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: The market is gearing up for a Bank of England rate hike — and several to follow

Futures markets are now forecasting a 100% chance of a Bank of England interest-rate hike on Thursday, from the current level of just 0.1%.

As the central bank prepares for a new tightening cycle, futures have priced in 120 basis points of increases by the end of 2022 — the most in one year’s time since 2009, when the U.K. was escaping the worst of the global financial crisis, according to UBS.

The U.K. is suffering from the same bottlenecks that other major economies are facing, as well as facing its own local headwinds in the form of Brexit-tied disruptions from a lack of truck drivers. The central bank’s new chief economist, Huw Pill, said inflation might top 5% early next year.

Philip Shaw, chief economist at Investec in London, is in the camp that the Bank of England will move rates higher by 15 basis points to 0.25%. “Our judgement is that most members will feel that there is relatively little to lose by raising rates by 15bps at this stage, but that its credibility is at stake should rising inflation prove to be more than transitory,” he said.

Anna Titareva, economist at UBS, said what is important is less whether the Bank of England hikes this month or waits until December, but rather the new medium-term inflation forecast.

“A forecast below the 2% target would be a clear signal that the current market pricing of cumulative five hikes by the end of next year is too aggressive,” she said. Titareva expects the Bank of England will wait until December to hike rates.

Kallum Pickering, senior economist at Berenberg, said what’s also notable is that futures markets are pricing in rate cuts from 2023 to 2025. “In essence, the market seems to expect a BoE policy error in the coming years in the form of an overtightening in 2022 that needs to be corrected with modest rate cuts thereafter,” he said.

The yield on the 2-year gilt
TMBMKGB-02Y,
0.658%

was 0.69% on Monday, compared to -0.07% a year ago.

The pound
GBPUSD,
-0.26%

was trading at $1.3627 on Tuesday, nearly flat on the year and down 4% from its June highs.

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