After the Bank of England (BOE) increased interest rates by half a point on Thursday, investors started pricing in BOE’s final interest level to be 6.25%, with an increase of 1.5 points.
Investors are speculating that the Bank of England (BOE) will raise interest rates to the highest level in more than two decades after officials ramped up rate hikes in the face of inflation rising harder than expected.
Money markets price a final policy rate of 6.25% in February according to interest rate derivatives, which means an additional tightening of one and a half points. The BOE’s benchmark interest rate last saw this level in 1998.
Policymakers had increased interest rates by half a point on Thursday, after previously cutting the rate of increase to quarter-point increases. Despite the rate hikes for the past year and a half, inflation is still well above the target level of 2 percent, which strengthens the argument that more aggressive interest rate hikes are needed.
Figures released on Wednesday showed that the CPI remained at 8.7 percent in May and surpassed expectations for the fourth month in a row, leading to a rapid repricing in the interest rate outlook. About a month ago, investors were pricing in that the BOE’s interest rates would peak below 5%.
The change in pricing caused interest in UK bonds to decline. UK benchmark bond yields have risen more this year than any other major competitor.