UK traders ramped up bets on higher interest rates after a hawkish signal from Bank of England (BOE) Governor Andrew Bailey, putting two-year yields on course for the biggest increase in more than six years.
Bailey said the central bank will “have to act” to curb inflationary forces and warned that higher energy costs mean price pressures will linger.
His comments were interpreted by traders as more evidence that the BOE is laying the groundwork for rates
hikes and suggest the UK might lead other developed economies in taking action to rein in inflation.
Money markets quickly shifted to reflect the BOE’s hawkish tilt, pricing a 15-basis-point rate hike next month. The two-year UK yield jumped 15 basis points to 0.73%, set for the biggest increase since 2015.
The market pricing “implies that interest rates will need to rise further and faster than at any point in the post-crisis years,” said ING’s James Smith. “It also signals that investors believe inflation is going to be a much bigger problem for central bankers in the UK than the US — or at least that the BOE is more likely to do something about it.”
There’s also a growing sense of concern that higher rates risk damaging the UK’s
fragile economy. Economists surveyed by Bloomberg have cut their estimate for 2022 growth by 0.4 percentage points to 5.1%.
But the threat of inflation has become too great for policymakers to ignore and UK traders have been moving forward their bets on rate increases for several months now. Traders see an additional 36 basis points of rate increases in December and are betting the BOE’s key rate will hit 1% by August, from 0.1% currently.
Economists at banks are following markets by shifting forward their forecasts for imminent tightening, with both Goldman Sachs and ING Groep NV now seeing a 15-basis-point hike to 0.25% in November as the most likely scenario.
The move in UK bonds mirrored a surge in the US, Australia, New Zealand, where expectations for policy tightening have also picked up. In the US, traders boosted bets on higher rates last week to almost 50-50 by June.
“The global theme is that higher inflation will likely be less transitory than earlier expected amid elevated commodity prices,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Strong U.S. retail sales data on Friday and much stronger-than-expected third-quarter CPI data in New Zealand this morning are encouraging this trend.”
In New Zealand, overnight-indexed swaps signal a 44% probability the central bank will raise its official cash rate by 50 basis points at its November meeting. No such probability was seen. The nation’s consumer prices jumped 4.9% in the third quarter from a year earlier, exceeding economists’ expectations.
“It’s more about the brute strength of the upside surprise to the headline data rather then the details even though they too were strong,” said David Croy, a senior strategist at Australia & New Zealand Banking Group Ltd in Wellington.
Australian yields were propelled higher as the pace of vaccinations quickened and the authorities began to roll back curbs on movements. The nation’s second-most populous city of Melbourne will end its months-long lockdown.
In China, the benchmark 10-year bond rose to a three-month high as traders pared bets for an easing after central bank officials downplayed risks from inflation and China Evergrande Group’s debt crisis. Risks posed to the Chinese economy by the property firm’s troubles can be contained, People’s Bank of China Governor Yi Gang said.