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(Bloomberg) — Traders sold gilts and boosted bets on Bank of England interest-rate hikes after officials said they stand “ready to act” to tackle any inflation surge triggered by war in the Middle East.
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UK government bonds slid, with two-year yields rising more than 35 basis points on Thursday to 4.46%. Swap markets now imply three quarter-point hikes by year-end, with the first expected as soon as next month. The pound rose 0.3% to $1.3301.
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All nine members of the Monetary Policy Committee voted to leave rates unchanged at 3.75% on Thursday, with Governor Andrew Bailey warning that policy must “respond to the risk of a more persistent effect on UK CPI inflation.”
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“The MPC has been forced into a rapid pivot,” said Seema Shah, chief global strategist at Principal Asset Management. “That even the most dovish member of the Committee, Swati Dhingra, supported an unchanged decision speaks volumes about the depth of the Bank’s inflation discomfort.”
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It’s a dramatic change of outlook. Less than three weeks ago, confidence had been running high that the BOE would deliver a cut today given a weakening labor market. Brent advanced beyond $118 a barrel on Thursday, with energy importers like Europe and the UK particularly exposed.
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“The market is now waking up,” said Luigi Buttiglione, CEO and founder of LB Macro SA. “It was clearly very complacent on the BOE rate outlook, still dreaming of a Bank concerned more by output than of inflation, which is not in the genes of an inflation targeter like the BOE amid a supply shock.”
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The European Central Bank is due to release its policy decision later Thursday. Traders have been adding to bets on hikes ahead of the announcement, with swaps implying around 70 basis points of tightening by year end.
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The Federal Reserve, meanwhile, held US interest rates steady as expected on Wednesday, with Chair Jerome Powell saying further reductions in borrowing costs will hinge on the path of inflation. Swap markets have priced out bets on US monetary easing this year.
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—With assistance from James Hirai, Alice Atkins and Naomi Tajitsu.
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(Updates pricing throughout, adds context.)
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English (US)