Britain’s short-term cost of borrowing hit its highest level in nearly two and a half years, as the City’s prices in a UK interest rate soon rise.
The yield, or interest rate, on UK two-year gilts hit their highest level since May 2019 this morning.
Two-year gilt yields hit 0.75%, down from just 0.57% on Friday night.
The rise in gilt yields is a sign that traders expect UK interest rates to rise soon, in a bid to fight inflation.
The yield on 10-year gilts also rose (from 1.1% to 1.15%), close to the two-and-a-half-year highs seen last week.
The move comes after the Governor of the Bank of England warned that she “should act” to curb rising inflation, sending a new signal that she is preparing to raise interest rates.
Andrew Bailey said he continued to believe the recent surge in inflation would be temporary, but predicted that a surge in energy prices would push it higher and prolong its rise, increasing the risk of higher inflation expectations.
“Monetary policy cannot solve supply problems – but it will and must act if we see a risk, especially for medium-term inflation and medium-term inflation expectations,” said Bailey Sunday.
During an online panel discussion hosted by the Group of 30 advisory group, Bailey explained:
“And that’s why we at the Bank of England have signaled, and this is another such signal, that we will have to act.
But of course, this action takes place at our monetary policy meetings. “
The Bank organized two more meetings of the MPC this year, on November 4 and then on December 16.
The Bank recently predicted that inflation would rise over 4% early next year, more than double its target of 2%. Soaring energy prices are adding to inflationary pressures, reinforcing expectations of rate hikes.
Jeremy Thomson-Cook, Chief Economist at International Business Payments Specialist Equal to money, points out that investors are now anticipating several rate hikes by the end of next year …
… even if British growth is not really sparkling.
With markets already fully anticipating a 0.15% rate hike this year and three more next year, raising the base rate to 1%, Bailey’s comments are unlikely to push the pound. [the pound] significantly higher.
But despite the upbeat rhetoric, Johnson’s government faces an unfortunate fact: Britain’s economy is not growing at the rate it wants. August’s GDP figures only rose 0.4%, meaning third-quarter growth is likely to be only half of the Bank of England’s 3% forecast. The economy is still 5% smaller than it would have been if growth had continued on its pre-pandemic path from 2010 to 2019; in contrast, the United States achieved this target in the second quarter of 2021.