Traders ramped up bets for further Bank of England interest-rate hikes after another shock inflation reading, pricing the benchmark reaching a level not seen since the turn of the century.
(Bloomberg) — Traders ramped up bets for further Bank of England interest-rate hikes after another shock inflation reading, pricing the benchmark reaching a level not seen since the turn of the century.
Money markets shifted Wednesday on the back of a report showing inflation remained higher than expected for a fourth month. Traders now expect the BOE’s key rate to reach 6% by December, which would mean another 150 basis points of increases this year. That may spur a renewed selloff when UK gilts open at 8 a.m. in London.
The UK has already been through the quickest tightening cycle in 40 years, and lifting the rate to 6% would add to the pressure on borrowers, deal another blow to the housing market and raise questions about the outlook for the broader economy. The BOE on Thursday is expected to raise rates by 25 basis points to 4.75%, though the risk of a half-point increase is growing.
Bloomberg Economics — which believes the market pricing is overdone — forecasts that such a scale of monetary action would send the UK into a shallow recession. Gross domestic product would shrink about 0.3% this year and 1.4% in 2024, according to its SHOK model.
Many households are already struggling because of the cost-of-living crisis, and an additional squeeze, plus worries about the economy, would add to the political headaches for Prime Minister Rishi Sunak. He says his focus is on lowering inflation. On Tuesday, Chancellor of the Exchequer Jeremy Hunt ruled out special mortgage support because it would only exacerbate price growth.
The last time traders were so hawkish on the outlook for interest rates was in September, when former prime minister Liz Truss shocked markets with huge spending plans. But sticky inflation and a tight labor market have led them to ramp up tightening bets once again, in contrast with their peers in the US and the euro zone, where policymakers are seen nearing the end of tightening cycles.
Read More on the UK Economy:
- Britain Is Adrift, and the World’s Executives Are Alarmed
- Surging Mortgage Costs Push UK Housing Market to Breaking Point
The shifting outlook has pushed UK bonds lower, lifting two-year gilt yields to the highest levels since 2008 on Tuesday. Just a month ago, bets were on a terminal rate below 5%, a level still seen as the most likely by economists surveyed by Bloomberg.
The market wagers on additional BOE hikes contrast with expectations for the Federal Reserve and the European Central Bank, with at most two more quarter-point increases expected.
“The UK is in a situation that is worse than Europe and the US, the risk of inflation expectations de-anchoring is the highest in the developed world,” said Raphael Gallardo, chief economist at Carmignac Gestion SA. “The Bank of England has to keep hiking.”
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