UK government bonds rallied as investors honed in on comments from Bank of England Governor Andrew Bailey that cast doubt over the pace of further interest-rate rises.
(Bloomberg) — UK government bonds rallied as investors honed in on comments from Bank of England Governor Andrew Bailey that cast doubt over the pace of further interest-rate rises.
Short-end bonds led the advance, with the yield on two-year notes down as much as 11 basis points to 3.57%. Money markets trimmed bets on the terminal rate in the current BOE tightening cycle by around 10 basis points to imply around 77 basis points of additional hikes by the end of the year.
“I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more,” Bailey said, according to a text released by the BOE on Wednesday. “Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.”
His comments appeared to catch traders off guard, who have been wagering on more aggressive hiking cycles from major central banks in recent weeks. Inflation and economic data out of the US and euro-area has been more resilient, spurring investors to price in three-quarters of a point of further BOE hikes, compared to half-a-point at the middle of February.
“Bank of England Governor Bailey has become the first central bank chief to push back against the hawkish global repricing of rates in recent weeks,” wrote Evercore ISI strategists including Krishna Guha in a note to clients.
Bailey said the BOE’s key rate at 4%, the highest since 2008, is “having an impact” on the economy, noting that it is “evolving much as we expected it to” since the February rate decision. He also said that some “further increase in Bank Rate may turn out to be appropriate.”
“If we do too little with interest rates now, we will only have to do more later on,” Bailey said. “The experience of the 1970s taught us that important lesson.”
–With assistance from Tom Rees and Andrew Atkinson.
(Updates with details from the speech and market reaction.)
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