Investors now expect UK interest rates to rise by February next year after the Bank of England signalled growing concern about a rise in inflation — with some even viewing a 2021 increase as an outside possibility.
Sterling was buoyed by the prospect of higher borrowing costs, while the price of UK government debt sank as traders brought forward their bets on the timing of the first rate increase. The market moves came after BoE rate-setters voted unanimously to hold interest rates at a record low of 0.1 per cent, but said they expected inflation to climb above 4 per cent this winter.
The decision to keep rates on hold had been widely expected, but investors said that votes by two of the nine-strong Monetary Policy Committee to end the BoE’s bond-buying programme immediately indicated that the central bank was moving closer to tightening monetary policy.
The votes from deputy governor Dave Ramsden and Michael Saunders signify an “increasingly hawkish stance on monetary policy, an important sign as markets focus on the potential for an interest rate increase in the first half of 2022”, said Oliver Blackbourn, a multi-asset portfolio manager at Janus Henderson Investors. Before Thursday’s meeting, markets had not fully priced in a rate rise to 0.25 per cent until summer next year.
Investors were also surprised by the MPC’s unanimous agreement that a rise in interest rates is a possibility even before the scheduled end point of the current asset purchase programme at the end of the year.
“If they’re happy to hike even with QE still running, then the November meeting is now a live meeting,” said Theo Chapsalis, head of UK rates strategy at NatWest Markets. “That wasn’t the case before today.”
The pound, which has struggled over the past week amid signs that the UK’s economic recovery is slowing, rebounded. It traded 0.6 per cent higher against the dollar at $1.371.
UK government bond prices fell, pushing the 10-year gilt yield up 0.09 of a percentage point to 0.88 per cent, the highest level in three months.
The BoE could face a tricky balancing act in convincing markets it can keep a lid on inflation expectations while at the same time reacting to a slowing economy, according to Peder Beck-Friis, a portfolio manager at Pimco.
“The BoE may be facing a tougher trade-off later on this year,” Beck-Friis said. “Although inflation is rising, activity is slowing faster than expected. We previously expected [the] BoE to start hiking rates in the second half of next year, but risks are building for an earlier hike in the first half of next year. ”
Source: Economy - ft.com
