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(Bloomberg) – Traders are quick to bet on rate hikes for the UK, betting that the Bank of England will deliver two outsized hikes by the end of the year to quell rampant inflation fueled by rising energy prices.
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Money markets have priced in a 200 basis point hike for the next three decisions, meaning the BOE will hike rates by three quarter points in two of those meetings.
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The first move could come as early as this week, with traders citing around a 60% chance of a 75 basis point hike on Thursday. That would be the bank’s biggest increase since 1989, when it boosted borrowing costs by a full percentage point.
Bank of England expects biggest rate hike in 33 years
The BOE meets to set policy against a deteriorating inflation outlook and a radical shift in course from global peers. The prospect of new government stimulus to support households and businesses as energy costs rise threatens to push inflation close to 10%. Last week’s data showed that US prices rose unexpectedly in August, fueling expectations of a more aggressive Federal Reserve tightening cycle.
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“The BOE seems much more concerned about today’s high inflation and managing it, albeit at the cost of weaker growth,” said Imogen Bachra, UK rates strategist at NatWest Markets, adding that there has been a “false shift” in the got BOE’s decision last August.
The upcoming additional fiscal boost should mean a “slightly more hawkish response” than before, although Bachra’s base case is that the BOE opts for 50 basis points in this week’s decision.
Taken together, the extent of the tightening being priced in by money markets means that the key interest rate will rise to 3.75% by the end of the year and 4.5% in March, around 80 basis points more than expected a month ago.
energy pressure
Fears that Russia will cut gas supplies further have pushed up energy prices in the UK and Europe, raising concerns that the BOE will struggle to get inflation back on track unless it takes more aggressive action to cool the economy economy seizes. Consumer price inflation slowed to 9.9% yoy in August.
The BOE wouldn’t be the only one raising rates so quickly. The European Central Bank hiked interest rates by 75 basis points in September, while the Federal Reserve hiked by the same amount in two consecutive meetings. Money markets baked another such hike for the Fed on Wednesday, setting a 12% rate for a one-point hike.
Still, markets are betting on UK rate hikes being reversed after BOE rates peaked in mid-2023. Traders are pricing in around 14 basis points of easing by the end of next year.
(Updates with comment, third-party context)
