Money-market traders are amping up bets on interest-rate hikes by the Bank of England after near-record UK wage growth put the spotlight firmly on Wednesday’s inflation report.
(Bloomberg) — Money-market traders are amping up bets on interest-rate hikes by the Bank of England after near-record UK wage growth put the spotlight firmly on Wednesday’s inflation report.
They added 6 basis points to their wagers, pointing to a bank rate of 4.56% by September, the highest level seen in almost a week. Yields on two-year gilts — among the most sensitive to changes in monetary policy — rose 5 basis points to a two-week high of 3.57%. The pound was on track to close at a five-week high.
“Barring a significant recovery in labor supply, we continue to expect the labor market to remain tight and wage growth to remain elevated through the year,” wrote Goldman Sachs Group Inc. economist Ibrahim Quadri in a client note.
Gas prices have fallen more than 80% from last year’s record peak and headline inflation due Wednesday is expected to slow to 10.5% in December — potentially the first consecutive drop since the pandemic struck in 2020. While UK policy makers slowed their pace of tightening to 50 basis points last month, Governor Andrew Bailey warned that risks to the outlook for inflation remain tilted to the upside.
Tuesday’s wage numbers — which grew the most since records began in 2001, excluding the pandemic peak — are adding to concerns.
“Pressure will be on the MPC to continue tightening into this slowdown,” Rabobank strategists including Richard McGuire wrote in a client note. They see policymakers raising official borrowing costs half a point next month. That compares with 46 basis points currently priced by money markets.
Treasuries resumed their decline Tuesday after cash markets were closed Monday for a US holiday. The 10-year benchmark yield rose 4 basis points to 3.55%.
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