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 falling as much as 11 basis points to 3.57%. Money markets trimmed bets on the BOE’s terminal rate by some 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, up from half-a-point at the middle of February.
“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.
The BOE has raised its benchmark rate by 390 basis points since late 2021 to 4%, the highest since 2008. Bailey said the tightening is having an impact on the economy, though activity is evolving much as policy makers expected to by the February rate decision, when they lifted rates by 50 basis points.
Still, Bailey noted the UK labor market remains tight, which is adding to pressure on prices. Back in 2021, when inflation began to creep up, he insisted it would be “transitory”. This time, he said the bank “must ensure that the situation does not get worse through homemade inflation taking hold.”
“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.”
Much of his speech, delivered at Brunswick Group’s Cost of Living Conference in London, focused on households’ financial difficulties, with inflation at over 10% — five times the BOE’s target. His remarks were probably the last ahead of the UK budget presentation on March 15 and the next BOE rate decision on March 23.
The BOE also released a report alongside Bailey’s speech that took evidence from outreach meetings across the country. The document said the BOE acknowledged worries that “households with mortgages would not be able to cope with rising interest rates,” and noted some people argued the bank should have acted sooner in the last couple of years when evidence was increasing that inflation was rising.
Citizens attending the sessions “told us they were struggling to afford essentials such as food, energy, fuel, and housing,” the BOE said, with those on low or fixed incomes such as Universal Credit or state pensions “particularly badly affected.”
In Bristol, interviewees were worried about the effects of Brexit – particularly the loss of migrant workers in the agricultural sector, and the effect this was having on wages. In Falkirk, Scotland, people felt the BOE had been “behind the curve”, while others questioned the purpose of rising rates when the pressure on costs was being driven by external factors such as the energy market.
–With assistance from Tom Rees and Andrew Atkinson.
(Updates prices and adds details from the speech.)
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