LONDON - Financial markets expect the Bank of England's Monetary Policy Committee to raise interest rates by an unprecedented half a percentage point at its March or May meeting, and to make a quarter-point rise at the other, according to pricing on Friday.
The BoE has only raised rates in quarter-point increments since it gained operational independence in 1997, but markets now price in a 98% chance of a total 75 basis points of tightening by May's meeting.
Just a few weeks ago in late January, financial markets did not expect rates to reach 1.25% until the end of 2022, and a little over a year ago - before inflation surged - markets expected the BoE to cut rates below zero.
At February's meeting, four of the BoE's nine policymakers voted for a 50 basis-point increase while the majority backed a 25 basis-point rise to 0.5%. This followed a 15 basis-point rise in December - the first back-to-back rate rise since 2004.
Stronger-than-expected U.S. inflation data released on Thursday prompted investors to bet more heavily on a half percentage-point move by the Federal Reserve at next month's meeting.
British two-year government bond yields, which are sensitive to speculation about BoE rate decisions, climbed by around five basis points on Friday to a peak of 1.414%, their highest since 2011.
The BoE has said it will stop reinvesting the proceeds of gilts which mature from its 875 billion-pound ($1.19 trillion)quantitative easing stockpile, placing extra pressure on gilt yields. It reiterated last week that it would consider actively selling gilts once Bank Rate reaches at least 1%.
($1 = 0.7349 pounds)