(Bloomberg) -- The Bank of England came within a whisker of hiking rates by half a percentage point this month, and traders are now seriously contemplating such a jump next time round.
Money markets have priced in an increase of 37.5 basis points to the bank's rate in March, implying traders see a 50% chance of a half-a-percentage point hike. Four of the nine-member Monetary Policy Committee pushed for that in the February decision.
The BOE has already delivered back-to-back hikes and another is taken as virtually guaranteed by markets. An increase of 50 basis points would be unprecedented since the central bank gained independence from the British government in 1997.
“We think there is potential for a larger rate increment in March given four members voted in favor of a 0.5% increase,” said Gurpreet Gill, macro strategist at Goldman Sachs Asset Management after the BOE's decision. “While 1% would be 0.25% higher than its pre-pandemic level, it is still well below where the main interest rate was before the financial crisis.”
U.K. bond yields soared in the aftermath of the rate decision, with two-year yields jumping to as high as 1.26% on Friday, a level last seen more than a decade ago. Ten-year gilt yields soared above 1.40% to a three-year high.
Yet Bank of England Governor Andrew Bailey has said he favors moving interest rates gradually instead of delivering an unexpected shock to get inflation under control.
“I am in the 25 camp because I think it's wise to take it in steps,” Bailey said in an interview with Bloomberg Television on Thursday. “The case for 50 is clear. But for me the 25 call was not a close call. It's about how to operate in a period of uncertain monetary policy.”
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