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Bank of England hints at interest rates hike

The Bank of England has sent a strong signal that it could soon raise rates, while the Fed remains hesitant over its asset purchasing.

The pound jumped by 0.4% on Monday before retreating as investors took on board comments made by two senior officials at the UK central bank over the weekend that alluded to a hike in rates at its next meeting.

The Bank of England already confirmed it will slow down on its weekly bond purchases, as Andrew Bailey, the governor of the central bank warned against the possibility of sustained inflation.

Investors are expecting to see a rate rise for the first time since the beginning of the pandemic, bringing bond yields to their highest point in well over two years.

Markets have priced in an increase of 0.25% in the base rate by December, and an additional rise of 0.5% by March 2022.

It represents a dramatic shift in expectations, as a mere month ago, many were of the view that the Bank of England would change rates in the second half of next year.

As has been done before, the Bank of England could be giving markets time to prepare for a hike in rates ahead of its meeting on 4 November.

Investors are anticipating a surge in inflation which could peak at around 6% next spring on rising energy prices.

The Financial Times is reporting that inflation will average 3% over the next ten years based on market prices. This is well above the Bank of England’s goal of 2%, but could it be an overestimation?

“The market is currently pricing a humongous overshoot in inflation, for all sorts of reasons from global pricing of oil and gas to our own homegrown problems about lack of [lorry] drivers and labour in general,” Peter Schaffrik, chief European macro strategist at RBC Capital Markets, told the Financial Times.

“The BoE is saying we have to be careful inflation expectations don’t fester and become a self-fulfilling prophecy — therefore as a policy response we have to nip this in the bud. That’s why you’ve seen the market turn very hawkish.”

Maybe rates are not the key thing to look at anyway, suggests economist Julian Jessop.

“The economic backdrop and fiscal choices will have a far bigger impact on the public finances than any likely changes in short-term rates (note the numbers below assume a full 1pp hike),” Jessop said.

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