Traders Up Bets on Faster BOE Rate-Hike Pace After Hawkish Vote

Traders upped bets on a second straight Bank of England interest-rate hike after all policymakers backed a first increase, with one calling for an even bigger move.

Interest-rate swap markets moved to imply a chance of around 50% of another quarter-point hike in December — up from 30% before the decision — with almost three more quarter-point hikes priced by the end of next year. The repricing pushed two-year gilt yields as much as five basis points higher to 4.79%, while the pound steadied around $1.3465.

The central bank raised its benchmark rate by 25 basis points to 4%, as expected. But the 8-1 vote caught the market’s attention, with external member Catherine Mann arguing for a half-point increase to 4.25%.

“I don’t see how they can wait until February,” said Hank Calenti, a fixed-income strategist at SMBC Bank International. The BOE is likely to hike in December, unless there are clear signs higher rates are weighing on the economy or “a real, sustainable, peace in the Middle East,” he added.

Thursday’s move marks a degree of catch-up for the BOE, which has held rates steady for longer than its main peers. The European Central Bank raised borrowing costs in June and September in response to the inflation shock emanating from the Middle East conflict, while the Federal Reserve hiked in September.

“The Bank of England has been reluctantly dragged into a global hiking cycle,” said David Rees, chief economist at Schroders. “The key question is whether this imported inflation shock remains contained, or will it start to feed into domestic wages and services prices.”

Some UK money managers remain wary despite seeing gilt yields as attractive at current levels.

“Further hikes look increasingly likely,” said Ed Hutchings, head of rates at Aviva Investors. El Niño, ongoing Middle East tensions and domestic political risks “are reasons to remain cautious as we head towards year-end,” he added.