Traders Delay Bets for U.K. Rates Rising to 1% Amid Omicron Woes

(Bloomberg) -- Traders are paring back bets on Bank of England rate hikes over the next year as concerns over fresh Covid restrictions outweigh inflation fears. 

Money markets are wagering the central bank’s key rate will rise to 1% by 2023 after Prime Minister Boris Johnson warned the U.K. is facing a “tidal wave” of omicron infections. Just over three weeks ago, traders saw borrowing costs hitting almost 1.25% by the end of next year.

Even before the omicron wave, some central bank officials and many economists indicated the 2022 rate-hike bets were too aggressive. In November, BOE Governor Andrew Bailey said such moves would leave inflation below the central bank’s 2% target at the end of the forecast period. He said he would “caution against” such views.

“This repricing could extend if the variant becomes a bigger factor,” said Rohan Khanna, rates strategist at UBS Group AG.

In recent months, traders ramped up bets for the BOE to tighten policy, with consumer price gains in October accelerating to the fastest in a decade. The U.K. central bank is expected to lift borrowing costs by February, four months ahead of its U.S. counterpart and well before the European Central Bank. 

The pullback in expectations sent the pound falling as much as 0.4% to $1.3222, while the yield on 10-year benchmark bonds was little changed at 0.74%. The BOE has previously indicated it would consider selling the bonds it owns directly once its key rate hits 1%. 

While worries over the omicron variant have driven U.K. markets in recent weeks, inflation concerns haven’t dissipated. One gauge of expectations is seen averaging 4.18% over the next 10 years, the highest in a quarter of a century. 

In contrast with BOE wagers, the ECB is expected to raise its deposit facility rate only 10 basis points by 2023. 

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