Traders increased their bets on further interest rate increases by the Bank of England after faster-than-expected UK inflation derailed expectations that the tightening cycle was almost over.
(Bloomberg) — Traders increased their bets on further interest rate increases by the Bank of England after faster-than-expected UK inflation derailed expectations that the tightening cycle was almost over.
Money markets priced in a peak BOE rate of as high as 5.5%, compared with around 5.1% on Tuesday, after the pace of price growth came in higher than any of the 36 estimates from economists or the 8.4% forecast by the central bank. The BOE’s key rate is currently 4.5%. Gilts slid and the pound rose.
Traders have more than fully priced in a quarter-point hike at the next decision, implying some hedging for a larger half-point increase. Of particular concern for officials is the closely watched gauge of core prices that excludes food, energy and tobacco, which accelerated to 6.8% last month from 6.2% in March.
“This core CPI print, notably an extremely unwelcome rise in service sector prices, has dealt a crushing blow to a beleaguered Bank,” said Jeremy Batstone-Carr, European strategist at Raymond James Investment Services. “We may still be far from the peak of rate hikes.””
The latest reading was seen as a key turning point for whether the central bank could soon let up on the fight against inflation. While it marked the biggest drop in the annual inflation rate in more than 30 years, it wasn’t nearly as big as the decline policy makers led by BOE Governor Andrew Bailey were forecasting.
The rates repricing send UK bonds sharply lower. The yield on 10-year gilts was up 15 basis points to 4.30% after rising as many as 21 basis points to the highest since October.
In contrast, the rate bets buoyed the pound, which was the world’s best-performing major currency Wednesday. Sterling rose as much as 0.5%, bouncing back from a one-month low touched on Tuesday, before trading 0.2% stronger at around $1.24.
–With assistance from Alice Gledhill.
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