(Bloomberg) — Traders are betting the Bank of England will hike its key interest rate above 1% next year for the first time since 2009.
Money markets are now pricing 100 basis points of policy tightening from the U.K. central bank in Dec. 2022, according to sterling overnight index swaps. That would push the BOE rate up to 1.25% from 0.25% currently.
The wagers follow a surprise move by policy makers to lift rates last week, boosting traders’ conviction on a steeper series of increases next year. Surging natural gas prices are pushing market-based measures of expected inflation higher, piling pressure onto the BOE.
The outlook for tightening comes even as data suggests the U.K. economy was losing momentum before supply shortages set in and omicron emerged. While Prime Minister Boris Johnson has ruled out further virus restrictions before Christmas, ministers may yet move to impose further curbs after Dec. 25.
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It’s not the first time traders have got ahead of officials by betting on an accelerated tightening cycle. Policy makers have bemoaned poor liquidity as muddying the signal from interest-rate markets, and that situation is exacerbated this time round by thin end-of-year trading conditions.
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