The repricing comes after Federal Reserve Chair Jerome Powell endorsed interest-rate liftoff in March while also opening the door to more frequent and potentially larger hikes than anticipated. In the U.K., consumer prices unexpectedly surged 5.4% from a year ago in December, piling pressure on officials to act.
Dealers are betting the Bank of England will raise interest costs again one month from now to control inflation running at the quickest pace in 30 years. Currency markets inclined up rate-climb bets to cost in a quarter-percentage point expansion in February, which would bring the bank rate to 0.5%. They additionally see the rate increasing to 1% in June from August beforehand. U.K bonds fell at the open as investors changed their assumptions. The two-year yield rose seven basis points to 0.99%, the most significant level beginning around 2011.
“Unfortunately, we haven’t heard from many BOE speakers since the December hike, so definitely a tricky one to assess on how much MPC members will push back,” said Pooja Kumra, senior European rates strategist at Toronto-Dominion Bank. “But for now markets will continue to react to Fed.”
The move next month would follow a surprise 15-basis-point increase in December, making it the first back-to-back hike since 2004. And it would open the door for the BOE to start shrinking its balance sheet by stopping the reinvestment of expired bonds, starting with 28 billion pounds ($37.6 billion) of gilts maturing in March.
While the BOE’s rate increase in December caught economists and traders off-guard, expectations for further monetary tightening are growing as the outlook for consumer prices darkens. Still, the U.K. is also grappling with a looming cost-of-living crisis that might deter officials from reducing monetary support quickly.
“With a hike in February looking likely, the obvious question is what comes next,” said Bloomberg Economics’ Dan Hanson and Jamie Rush in a note last week. “Here we remain skeptical that the MPC will raise rates by as much as financial markets expect.”
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