Traders Ramp Up BOE Rate Bets, Raising Concern Over Policy Error

(Bloomberg) --

Traders increased their bets on Bank of England tightening on Monday, raising concerns that a rapid pace of rate hikes will end up hurting growth.

They now see around 40 basis points of interest-rate increases this year, which would take the key rate to 0.5%. That compares with roughly 20 basis points last week.

The tightening could come in two instalments, with an initial 15-basis-point hike in November followed by a quarter-percentage-point increase in December. Traders see a further rate increases next year, betting that borrowing costs will climb to 1.25% in November 2022.

The repricing comes after BOE Governor Andrew Bailey said on Sunday the central bank will “have to act” to curb inflationary forces and warned that higher energy costs mean price pressures will linger. 

While speculation is growing that central bank is going to move to quash inflation, there’s also a sense now that higher rates risk damaging the U.K.’s fragile economic recovery. 

The outlook for U.K. growth next year was trimmed by 0.4 percentage points to 5.1%, the sharpest reduction for any major European economy, according to a monthly survey by Bloomberg published Monday.

“We’re already well past the point where hike bets are self-defeating,” said Antoine Bouvet, head of European rates strategy at ING Groep NV. “If that’s really what the BOE does, everyone will be screaming ‘policy error’ and rightly so,” he said, pointing to market pricing for the key rate in 2022.  

Three-month sterling Libor -- the rate at which banks can theoretically borrow from one another -- surged by 9.7 basis points to the highest since June 2020. U.K. two-year government bond yields jumped as much as 17 basis points to 0.75%, before paring the move. 

The pound was 0.1% weaker at $1.3737 as of 6:46 p.m. in London after falling as much as 0.3% earlier.

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