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Investors rein in rate hike bets after BoE softened message

British pound coins are shown in front of the displayed stock chart in this illustration
British pound coins are seen in front of the displayed stock chart in this illustration dated November 9, 2021. REUTERS/Dado Ruvic/Illustration

March 17, 2022

By David Milliken

LONDON (Reuters) – Investors reduced expectations for future Bank of England rate hikes this year, sending UK bond prices sharply higher after the BoE hiked again on Thursday but softened its talk of further tightening.

The BoE has now hiked rates for three consecutive meetings, bringing the policy rate back to pre-pandemic levels of 0.75%. On Thursday, it revised its forecast to mean that further tightening could be “possibly” needed, rather than “likely” as it was in February.

While rising commodity prices, fueled by Russia’s invasion of Ukraine, are likely to see inflation peak higher than previously expected, it also increases the risk of an economic downturn, the BoE said.

Unlike in February, none of the nine members of the Monetary Policy Committee voted in favor of a 50 basis point hike, and Lieutenant Governor Jon Cunliffe opposed any change.

“BoE continues to signal rate hikes but also more caution,” Bank of America economist Robert Wood and credit strategist Agne Stengeryte wrote in a note to clients.

The BoE’s message appeared calibrated to eliminate market bets that the central bank would hike rates by half a percentage point at a future meeting, they said.

Last month, four out of nine policymakers voted in favor of such a move to tame inflation expectations, which is larger than any rate hike by the UK central bank since operational independence in 1997.

Rate-sensitive two-year gilt yields hit a monthly high of 1.472% just before the BoE decision, but later fell 20 basis points.

As of 1659 GMT, the two-year yield was 10 basis points lower from Wednesday’s 1.29%.

The intraday decline was one of the largest in the two-year returns after each BoE decision. Bigger declines came in November, when many investors had expected the BoE to start tightening policy, and in March 2020, when it announced an emergency £200 billion in bond purchases at the start of the COVID-19 pandemic.

Benchmark 10-year gilt yields fell 6 basis points on the day to 1.57%.

Financial markets see a 91% chance that the BoE will hike rates to 1% at its next meeting in May – when inflation is expected to hit 8% – and a 73% chance that it will by the end of 2nd quarter % will reach.

Prior to the meeting, markets were fully priced in rates of 1% in May and 2% in December, with a 50 basis point rate hike priced in sometime in the next three months.

Pantheon Macroeconomics’ Samuel Tombs said the reassessment of market interest rate expectations for the next six months is sharper than any in more than a decade except after the surprise decision in November.

(Writing by William Schomberg, editing by Mark Heinrich and Catherine Evans)

https://www.oann.com/investors-rein-in-rate-hike-bets-after-boe-softens-message/?utm_source=rss&utm_medium=rss&utm_campaign=investors-rein-in-rate-hike-bets-after-boe-softens-message Investors rein in rate hike bets after BoE softened message

DUSTIN JONES

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