(Bloomberg) -- The Bank of England's surprise rate hike has boosted traders' and economists' conviction on a steeper series of increases next year.
Money markets are seven basis points away from pricing a quarter-percentage point hike to 0.5% at the BOE's February meeting, a level that could pave the way for the central bank to start letting bonds on its balance sheet mature without reinvesting the proceeds.
The BOE's move comes as the Monetary Policy Committee battles the dual threats of the omicron variant prompting new restrictions and the fastest inflation in more than a decade. Economists at Nomura Holdings Inc. and Berenberg were in the minority of forecasters who expected a 15-basis-point hike on Thursday, and they're calling for an even steeper increase in February.
“The 50/50 knife edge MPC decision today fell on the side of combating inflation as opposed to fears of omicron,” said Craig Inches, Royal London Asset Management head of rates and cash. “The MPC will be cautious in its approach to rate rises in 2022, however a move to 0.5% is likely in February.”
The pound rallied as much as 0.8% to a three-week high of $1.3374. Gilt yields pared their advance, with 30-year rates trimming an earlier ascent of as much as 10 basis points to trade little changed at 0.92% as of 4:19 p.m. in London.
U.K. Bonds Slump After BOE Stuns Market by Raising Rates
“Delaying the hike amid elevated uncertainty, as most pundits expected, would have been understandable,” said Holger Schmieding, an economist at Berenberg. “But it would not really have made sense. Inflation pressures are elevated and look set to remain so in the U.K.”
A move to 0.5% in February is seen as the threshold after which policy makers may let bonds that mature in its 875-billion pound ($1.2 trillion) asset-purchase program roll out of the portfolio without being replaced. It could therefore determine whether the central bank reinvests 28 billion pounds of proceeds from bonds maturing in March.
In addition to expectations for February, traders also see the central bank's key rate rising to 1% by September from November previously. The BOE has previously indicated it would consider selling the bonds it owns directly once borrowing costs climb to that level.
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