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Traders Push Back BOE Rate Bets After Bailey’s Mixed Signals

Traders Push Back BOE Rate Bets After Bailey’s Mixed Signals

Money markets now see Bank of England interest rates staying low for longer after its decision to keep its policy unchanged.

Traders are no longer fully pricing the central bank’s key rate hitting 1% next year, now seeing that level only reached in early 2023. The unwind of these bets -- that saw 1% by August before Thursday’s meeting -- continued to depress the pound and gilt yields on Friday.

The moves come amid frustration among many market participants at Governor Andrew Bailey’s failure to push back against the market pricing, which was triggered by his comments calling for action on inflation just last month. 

Bailey said it wasn’t the BOE’s job to guide financial markets on a week-by-week basis. His remarks echoed recent comments by European Central Bank President Christine Lagarde, who pushed back against markets pricing a rate hike next year but then added that it “wasn’t for me to say” if investors were ahead of themselves. 

“The BOE has all-but-confirmed that the previous hawkish market pricing was unwarranted,” said Daniela Russell, head of U.K. rates strategy at HSBC Holdings Plc. “Regardless of what happens in the near-term, what matters most is where rates eventually get to. We do not think they will rise far.”

Traders Push Back BOE Rate Bets After Bailey’s Mixed Signals


Two BOE policy makers voted for an immediate rate increase. One, Michael Saunders, said last month that markets were right to price in an earlier hike than previously expected. He’s concerned that capacity pressures and higher pay growth are driving an inflation pickup that “could become more persistent unless monetary policy responds.”

While traders still see the BOE hiking next year -- starting in February -- attention is now turning to Bailey’s emphasis on the low interest-rate regime remaining in place for the foreseeable future. That’s also putting a cap on bets further out.

In an interview with Bloomberg TV following the decision, Bailey indicated the U.K. will not escape “a world of low interest rates,” noting a range of around 0% to 1% since the financial crisis a decade ago. Markets had previously priced 130 basis points of tightening by the end of 2022, which would indicate a BOE rate of 1.4%.

BOE’s Bailey: Market Pricing for Rate Hikes Was ‘Overdone’

That left gilt yields and sterling continuing to head downwards in tandem. Five-year yields led the move Friday, falling 6 basis points to 0.60%, after plunging the most since the Brexit referendum on Thursday. The pound dropped as much as 0.6% to $1.3424, the lowest since September.

“For me it was not about a hike now or in December but the pushback on the scale of tightening priced in, which was bound to come,” said Rohan Khanna, a rates strategist at UBS Group AG. “So some of this rally is a good rally.”

©2021 Bloomberg L.P.