BOE Rate-Hike Bets Pick Up Leaving Option Traders Wanting More

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Unimaginable just six months ago, investors are piling in to bets that will pay out if the Bank of England raises interest rates for the first time since 2018.

The central bank sparked the game-changing moment earlier this month, after policy makers signaled optimism that the U.K.’s vaccine push would see growth rebound from the worst recession in more than 300 years. Officials further emphasized that sub-zero rates weren’t an imminent prospect, even as a report on their feasibility encouraged preparation for such a scenario.

BOE Rate-Hike Bets Pick Up Leaving Option Traders Wanting More

This marked a sharp turnaround from September when the BOE first flagged such a report was being undertaken, rubbing salt in to the wounds of traders who joined crowded bets on interest rates falling below 0% for the first time ever.

Money markets can double current expectations and price in a 25 basis-point rate hike over two or three years, according to Bob Stoutjesdijk, a Rotterdam-based fund manager at Robeco Institutional Asset Management who cited higher U.K. growth and inflation rates later this year, the nation’s proneness to price increases and the continued global reflation theme.

BOE Rate-Hike Bets Pick Up Leaving Option Traders Wanting More

Traders are targeting even more rate hikes for further ahead, buying options on short-sterling futures that will pay off if the central bank raises rates 100 basis points by the end of 2024, compared to 50 basis points now.

The Bank Rate was last seen above 1% over a decade ago when the central bank slashed interest rates by more than 400 basis points in response to the global financial crisis.

Money markets have almost erased BOE easing bets, pricing two basis points of cuts by early next year, ahead of testimonies later Wednesday by policy makers including Governor Andrew Bailey and Deputy Governor Ben Broadbent.

Read more:
  • U.K. INSIGHT: Surging Inflation? Yes. A Hawkish BOE? Think Again

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