Traders Bet BOE Will Join Half-Point Rate-Hike Club by September

(Bloomberg) -- The Bank of England will amp up its tightening cycle with its largest interest-rate increase in almost three decades, if market pricing is proved correct. 

Traders are wagering on 125 basis points of tightening from the BOE by its September decision, according to swaps tied to meeting dates. That implies three quarter-point hikes and one half-point hike over its next four decisions. The latter hasn’t been seen in the U.K. since 1995, predating the BOE’s independence by two years.

Surging inflation the world over is pushing central banks to consider larger-than-conventional interest-rate hikes. The Federal Reserve is expected to raise rates by a half-point in its upcoming decisions, a move the Reserve Bank of New Zealand went for last month. That’s prompted economists to start wondering if the traditionally dovish European Central Bank would go down the same route. 

There are signs the BOE’s predicament is particularly troublesome as it balances price pressures against threats to economic growth amid a cost-of-living crisis. Britain’s inflationary shock combines the worst of cost problems in the U.S. and Europe, making it harder for policy makers to address than in any other leading industrialized nation, the head of the International Monetary Fund’s European department said last month.

The BOE’s next decision is Thursday. Four members of the nine-member Monetary Policy Committee voted for a half-point rate rise in February. The central bank ultimately lifted rates by 25 basis points then and also in March, when there were no votes for a larger move.

©2022 Bloomberg L.P.