U.K. Traders Are Now Betting on Two BOE Rate Hikes Next Year

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(Bloomberg) — Money markets traders are pricing in tighter monetary policy from the Bank of England as inflationary pressures in the economy build.

They now see a quarter-of-a-percentage-point increase to the BOE’s key rate by December 2022, on top of a 15-basis-point hike that was already priced for May. That would take it to 0.5% by the end of next from 0.1% currently.

Bets were brought forward after data Wednesday showed U.K. inflation surged more than expected to the strongest pace in more than nine years, while U.K. company payrolls climbed above its pre-pandemic level in August.

The shift in market expectations also follows a change in forward guidance from the BOE last month, where policy makers said they now foresee some “modest tightening” over the next three years. Last week, Governor Andrew Bailey said he is among officials who think a minimum criteria for tighter U.K. monetary policy has been met.

The BOE will “be focused on the medium-term outlook for prices and the labor market which, as seen in yesterday’s jobs market report, is holding up better than feared,” said Dean Turner, an economist at UBS Global Wealth Management. “These will keep the Bank of England in a hawkish mood, laying the ground for a rate hike in the first half of next year.”

It’s a sharp turnaround from the second half of last year, when traders were pricing in rates as low as minus 0.1% as the economy sputtered. They only removed bets on further loosening in February, when policy makers stressed that negative rates are not imminent amid the U.K.’s successful vaccine rollout.

While the central bank traditionally shifts its key interest rate by multiples of 25 basis points, it last cut rates by 15 basis points in March 2020, at the height of the coronavirus pandemic. If officials wanted to raise rates, a move back to 0.25% is seen by strategists as the likely first step.

(Adds context throughout, analyst quote in 5th paragraph.)

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