Global traders are betting wildly on a rate rise. Is the Bank of England set to raise interest rates next month?

Spark Global Limited reports:

Bond yields around the world seem to be rising in the shadow of higher interest rates.
Last weekend, the governor of the bank of England bailey said the central bank “will have to take action about inflation,” crazy traders bet on the interest rate for the bank of England interest rates ahead of time, on Monday, a day to two-year gilts (gilts) yields high 17 basis points to 0.75%, for its biggest one-day gain since 2010, then slowed slightly. More strikingly, three-month Libor jumped 7.9 basis points, the biggest one-day rise since the Lehman Brothers affair.

Spark Global Limited reports:
Spark Global Limited reports:

On Sunday, Bank of England Governor Bailey said:

“Inflation will last longer… This has heightened the central bank’s fears and worries about potential inflation. That is why the Bank of England has been signalling that it must act. Of course, we will have a monetary policy meeting first.”

As Deutsche Bank points out, the Bank of England has been clear enough. The bank of England is expected to raise interest rates, which means the fastest wave of policy tightening this century is coming, according to institutional analysis.

The boe is currently pricing in a 115 basis point rate hike to 1.25% by the end of 2022. According to guidance it issued in August, the central bank could stop reinvesting bonds in its quantitative easing programme once interest rates hit 0.5% if economic conditions permit. Markets now expect rates to hit 0.5% in December. If it then stopped reinvesting bonds immediately, it would reduce its balance sheet by about £37 billion next year. According to former Governor Carney, this is equivalent to a 31 basis point rate hike.

Of course, the actual impact is uncertain, with the Bank of England saying in August that shrinking the balance sheet might have less impact on monetary conditions than expanding it. But with its £35bn of gilts maturing in 2023, the central bank is set to sell bonds directly once interest rates hit 1 per cent, so the overall tightening could be even more severe.

Wall Street titans are voicing concerns that the Bank of England is more likely to raise interest rates next month

Goldman Sachs economists noted in an Oct. 15 note that while the bank sees an equal chance of a Boe rate hike in November and December, the odds are slightly higher for the November meeting because of the press conference and updated forecasts in the monetary-policy report. Goldman sachs expects the BANK of England’s monetary policy Committee to raise rates three times at different points in its meetings, taking the bank’s base rate to 0.75% by May and 1% by the end of next year.

Jpmorgan chase also brought forward its boe rate hike forecast after Bailey’s comments on Sunday. It expects the boe to raise rates by 15 basis points in November, followed by 25 basis points in February and 25 basis points in August (previously 15 basis points from February).

Allan Monkss, economist at jpmorgan, said Bailey’s hawkish comments for the second week in a row had fuelled expectations of a more aggressive monetary policy by the bank of England. One risk to this view is that the Boe will instead choose to send a strong signal in November and then act in December, possibly with a one-off 40 basis point rise; Or 15 basis points in December, followed by 25 basis points in February.

Moreover, Sonali Punhan at Credit Suisse believes that in addition to expecting the Boe to raise rates next month, a hike to 0.5% in the first quarter of 2022 could slow the economy.

In contrast, the UK money markets reacted more strongly, with the Bank of England now expecting a 36 basis point rise in December and a further 20 basis points in January. Traders are more aggressive than Goldman, predicting the Bank of England’s key rate will hit 1 per cent in August next year, up from 0.1 per cent now.

 

However, Foreign media analyst Michael Read is not too convinced that the Bank of England will raise interest rates soon, he said:

“It is fair to say that the speed at which interest rates are now thought likely in the UK is unprecedented. There is no guarantee that this will happen, however, and the bank of England’s leaders will squabble over a vote to raise interest rates in the near future. If the MPC talks break down, the near-term move in interest rates will be significant. While there have been more warnings that policy could go wrong, yesterday’s price action suggests the market doesn’t care if it goes wrong.”

But whether it raises rates or not, some are already criticising the Bank’s actions. Former Bank of England policymaker Danny Blanchflower, who last week suggested the US was already in recession, said this week that UK interest rates would soon be a “terrible mistake”. In an interview with British media, he said:

“I think they will raise rates, but it would be very foolish to do so. In my view, every rate rise since 2008 has been a mistake. The Labour market consequences of the government’s earlier leave scheme are hard to fathom. There is some inflation, but it looks temporary. The central bank’s response to these changes has been a big mistake, and it’s looking more and more like 2008.”

As previously reported in the Gold 10 data, with both the Bank of England and the Treasury preparing to withdraw stimulus, the UK risks a double policy error.
Traders are positioning themselves for higher interest rates

In fact, with the exception of UK gilts, yields are racing higher around the world. Treasury yields resumed their upward trend on Monday, with the five-year yield rising to its highest level since early 2020 to close at 1.193%. The 10-year yield was back above the 1.6 percent mark, while the two-year yield was at 0.438 percent. The 30-year Treasury yield ended slightly lower at 2.034 percent, as the spread between yields on 5-year U.S. Treasury bonds narrowed to its lowest level since 2020.

 

Ellis Phifer, market strategist at Raymond James in St. Petersburg, said the higher interim yields suggest investors are positioning for higher interest rates while maintaining confidence that the Fed will be able to control long-term inflation. The market thinks the Fed can fight inflation effectively, so long-end bonds are not out of control.

But bank of America thinks the narrowing spread between 5-year and 30-year Treasury bonds is a sign that stagflation or recession is coming, that the Fed has lost control of inflation expectations, and that next year will be a year of interest rate volatility (see previous gold 10 news).

Outside the US and UK, bond yields in the European Union also rose slightly on Monday, following the rise in UK gilts. German 10-year bund yields rose 2 basis points to -0.15% on Monday. Rainer Guntermann, rates strategist at Commerzbank, said:

“The Bundesbank looks set to be torn between comments from the ECB on dovish inflation expectations and rate rises in the US and UK.”

In Asia Pacific markets, New Zealand and Australia bond yields also rose sharply on Monday. China’s 10-year bond yield, which rose to 3.04 per cent on Monday, adjusted in tandem with the overdue RRR cut.

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