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UK investors ramp up bets on BoE rate rise after inflation shock

UK investors ramp up bets on BoE rate rise after inflation shock
UK investors ramp up bets on BoE rate rise after inflation shock   -   Copyright  Thomson Reuters 2021
By Reuters

LONDON – Investors sharply increased their bets that the Bank of England is about to raise interest rates for the first time since the COVID-19 pandemic, after inflation data came in far higher than forecast on Wednesday.

Interest rate futures showed a 66% chance that the BoE will raise Bank Rate to 0.25% from 0.1% when it announces its December policy decision at 1200 GMT on Thursday, up from less than 50% before the November inflation numbers.

Consumer price inflation targeted by the BoE surged to a 10-year high of 5.1% in November, hitting a level which the BoE only expected to see in April next year.

“The BoE is more likely to hike after another inflation surprise today,” Nomura strategist Jordan Rochester wrote in a note to clients, arguing that the rise in inflation reflected the strength of longer-term price pressures.

Two-year gilt yields, which are sensitive to short-term interest rate expectations, were on track for their biggest daily rise in just over a month, up more than 6 basis points on the day at 0.50%.

Short sterling rate futures also priced in a faster pace of tightening next year.

Before a BoE rate announcement last month, investors had priced in a near-100% chance of a rise that month, following comments from Governor Andrew Bailey which they interpreted as a signal that an increase in borrowing costs was imminent.

But only two of the BoE’s nine policymakers voted for a rate rise, with Bailey and others preferring to wait for official data to confirm that the end of government’s job furlough scheme on Sept. 30 had not led to a big rise in unemployment.

More recently, news of the Omicron variant prompted Michael Saunders – one of the two policymakers who voted for higher rates last month – to state that there “could be particular advantages in waiting” before raising rates.

The BoE would be the first major central bank to raise rates since the start of the pandemic if it does so on Thursday.

“Under usual circumstances, (inflation) would be consistent with an imminent rate rise,” HSBC economist Chris Hare said. “But the decision is not a straightforward one by any means”.