Traders Ramp Up BOE Bets After Bank Toyed With Half-Point Hike

(Bloomberg) -- Traders pulled forward their expectations for monetary policy tightening by the Bank of England after it raised interest rates for a second straight meeting, while coming close to delivering an unprecedented half-point hike.

Money markets now see the rate rising to 1% by May, the threshold at which the central bank has said it could start shrinking its balance sheet. They see the rate rising to 1.5% by September, compared with early next year before the decision.

The BOE delivered a quarter-point increase on Thursday, in line with expectations, taking the bank rate to 0.5%. Yet four BOE officials voted to boost rates by 50 basis points, seeing the need to act faster to curb inflation expectations.

The repricing shows investors expect policy makers will move more aggressively than previously thought in unwinding the stimulus unleashed during the pandemic, given the deteriorating outlook for consumer prices. Inflation in the U.K. accelerated to 5.4% in December, the highest level in three decades.

“There is certainly a hawkish skew,” said Edward Hutchings, the head of rates at Aviva Investors. “This will turn up the heat and focus on the unwind of gilt purchases when interest rates hit 1%.”

U.K. government bonds plummeted, sending benchmark yields to the highest level in three years. The rate on 10-year gilts rose nearly 13 basis points to 1.38%, the highest since December 2018. The pound pared gains after hitting the strongest level in two years against the euro.

“The lesson here seems to be that the BoE always has a surprise up its sleeve,” said Antoine Bouvet, senior rates strategist at ING Groep NV. “My take is that the BoE is also of the opinion that tightening should be front-loaded and the door is now wide open to hike in subsequent meetings.”