Investor expectations of the UK interest rate hike have soared this week on the back of stronger-than-expected jobs and inflation data, putting markets increasingly at odds with the UK’s own message. Bank of England that it is near the end of its growth cycle.
Traders are now pricing at three more rate increases to a peak of around 5 percent in September, a sharp rise from last week’s expectations of 4.6 percent, before figures showing stubbornly high inflation caught the market by surprise this week.
Annual increases in UK consumer prices failed to fall below double digits in March at 10.1 percent, and core inflation, which excludes volatile food and energy prices, remained flat. changes at 6.2 percent.
“Inflation is higher than the market expected and when you look at the labor market in particular, which is not a source of inflation now but will be in the future, it also appears to be stronger than anticipated,” said Peter Schaffrik. , an economist at RBC Capital Markets, who raised his forecast for BoE rate increases this week.
Adding to the high inflation, average earnings excluding bonds rose 6.6 percent on-year, according to figures from the Office for National Statistics this week, ahead of a 6.2 percent rise forecast by economists.
RBC expected the central bank to hold rates at its next meeting, but raised its forecast to a 0.25 percentage point rise in May. Schaffrik said a 5 percent terminal rate was “not impossible” as jobs data had also been strong in the US and Europe, and banking concerns had faded.
The 10-year government bond yield has also risen in recent weeks, from 3.4% at the beginning of the month to 3.8% on Thursday, reflecting expectations for higher rates.
The price moves have come despite recent suggestions by BoE policymakers that they are coming to the end of their monetary tightening now that interest rates are at 4.25 percent.
In a speech in early March, the bank’s governor, Andrew Bailey, signaled that he thought financial markets were wrong to believe there was a pressing need for many more rate hikes, warning markets against taking a strong stance and saying that the BoE was now waiting and… see way. He had changed from an earlier position that “further increases in the [benchmark] a bank fee would be required.
Huw Pill, the bank’s chief economist, said the BoE now needed to exercise “judgment” and should not view stronger activity as necessarily inflationary because the reversal of natural gas price increases meant better economic data was not forthcoming. “something inherently inflationary.”
While he indicated that it was still necessary to show that the BoE had done enough to defeat inflation, none of his comments suggested an inclination to raise rates to 5 percent.
While market expectations for rate hikes have risen this week, the timing of expected rate cuts hasn’t changed much, with markets falling later this year.
But Imogen Bachra, head of UK rate strategy at NatWest, said it was “unlikely” the BoE would cut rates as soon as the market expected given “more evidence of stronger underlying inflationary pressures, relatively moderate risks so far in the financial system compared to other countries and the fact that the barrier to easing is higher than in previous cycles”.