Recent statements by leading UK central bankers have caused a major shift in opinion in the financial markets.
A large majority now expects an increase in the key interest rate, which has been at a record low of 0.1 percent since March 2020.
At the weekend, the head of the Bank of England (BoE), Andrew Bailey, stressed that the central bank “has to act” to counter medium-term inflationary pressures.
After the interest rates on the futures market, around 90 percent of investors now expect the Bank of England to raise the key rate to 0.25 percent at its meeting on November 4th.
It would be the first major central bank in the world to tighten its monetary policy.
Business correspondent based in London.
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In response to the interest rate hike, which is now considered very likely, prices for British government bonds have fallen significantly and yields have risen accordingly. This trend has been evident for a few weeks, but has now intensified. In September the yield on two-year government bonds was 0.2 percent, now it has climbed to around 0.7 percent. The yield on ten-year paper rose from 0.7 to 1.17 percent. This shows both heightened inflation concerns and the expectation of imminent interest rate hikes. Many market participants believe a second rate hike to 0.5 percent in December is likely. According to the prices on the futures market, investors are now assuming that the key rate will be above 1 percent by the end of 2022. Some even expect 125 percent - this would be the highest level since the financial crisis of 2008/2009.
Markets adjust to a rate hike
In his remarks at the “Group of Thirty” financial forum, Bailey had emphasized that he still considered the rise in the inflation rate to be temporary, but the recent sharp rise in energy prices made the inflationary surge larger and let it last longer than previously expected.
The central bank cannot solve any supply-side problems, namely the bottlenecks that accompany the recovery after the corona recession.
But monetary policy must prevent inflation expectations from becoming established and a spiral of rising prices and wages from beginning.
Inflation in the UK has already risen well over 3 percent.
While the BoE is forecasting the peak at 4 percent, many economists believe an increase of up to 5 percent is quite possible.
Michael Saunders had previously spoken out on the part of the “hawks” in the monetary policy committee of the central bank, whereas economist Silvana Tenreyro assessed a rate hike as potentially counterproductive.
But what matters is Bailey's voice.
His statements were very explicit, said Jim Reid, senior credit strategist at Deutsche Bank.
As the markets prepare for a rate hike, some market participants have begun to complain about it.
Warnings in the London financial press that the BoE would “make a mistake” if it tightened monetary policy too quickly increased.Keywords: rate, bank of england, andrew bailey, interest rate hike, interest rate, inflation spurt, statements, london, bankers, interest rate hikes, market participants, increase, hikein, opinion, shift