Markets brace for Christmas BoE rate hike

THE UK could be stung by an earlier than expected rate hike as the Bank of England moves to hose down runaway inflation.

Investors kicked off the week yesterday by repositioning their bets toward a first rate increase since the onset of the Covid-19 crisis at the Bank’s last rate setting meeting of the year in December.

Just a month ago, markets did not expect the Bank to move until the summer of 2022. 

Strengthening predictions over a looming rate hike triggered a sell off in government bonds, driving borrowing costs to levels not seen in over two years, hitting 1.21 per cent.

The shift came after two of the Old Lady’s most senior officials gave the strongest signal yet that the central bank is ready to choke off inflation.

Governor Andrew Bailey and Michael Saunders, an external member of the Bank’s rate setting committee, gave two interviews signalling officials on Threadneedle Street’s agitation over the pace and duration of the current inflation spike.

“Unfortunately, if you look at our last forecast, [inflation] is going to go higher, I am afraid,” Bailey said on Saturday. Meanwhile, in a separate interview, Saunders urged Brits to hunker down for “significantly earlier” rate hikes from the Bank.

Bailey said the Bank needs to act to prevent inflation from becoming “permanently embedded” in the British economy.

The reposition was further fuelled by analysts at Bank of America bringing forward their bet on when the Bank will hike rates. 

“We now expect the BoE to hike 15 basis points at their December meeting (previously February) and 25 basis to 0.5 per cent in February 2022 (previously February 2023).”

They also think inflation will scale to five per cent, more than double the Bank’s target and above its own forecasts.

“The supply shocks seem to grow by the week… BoE speakers have so far focused only on inflation rather than the growth risks from recent developments. They appear ready to hike soon,” BoA said.

The prospect of higher interest rates could hit Chancellor Rishi Sunak’s drive to restore the public finances.

Each additional percentage point rate increase swells the government’s interest bill by £10bn, according to research by the Institute for Fiscal Studies.