Traders Anticipate Further BoE Rate Hikes Amid Inflation Concerns
Market Reactions and Economic Outlook Following BoE Decision
By Harry Robertson and Darshan Kumar R
BoE Raises Rates and Signals Further Increases
LONDON, Nov 5 (Reuters) - Traders added to their bets on UK rate hikes on Thursday, pushing up government bond yields, after the Bank of England raised borrowing costs for the first time since 2023 and signalled at least one more increase was likely if the Iran war continues.
With an increased focus on inflation, the BoE's Monetary Policy Committee voted 8-1 to hike rates. Dissenter Catherine Mann opted for a bigger 50 basis point (bp) increase.
Governor's Remarks and Inflation Projections
Governor Andrew Bailey acknowledged the sharp drop in oil prices following the US midterm elections, but said the outlook for inflation and rates was uncertain, adding that there was still "inflationary pressure in the pipeline".
The BoE projected British inflation would rise to around 5% in mid-2027, after it came in stronger than expected in September at 3.5%, well above its 2% target.
"The decision was a very hawkish surprise," said Alexandros Xenofontos, lead UK economist at TS Lombard.
Market Response to Rate Hike
Traders reacted by raising their bets on rate hikes and selling bonds, pushing up their yields.
Bond Yields and Money Market Movements
Britain's benchmark 10-year bond yield was last up 3 bps at 5.17%, having traded 2 bps lower pre-decision. Rate-sensitive two-year bond yields were 4 bps higher at 4.79%, with a rebound in oil prices after Wednesday's fall also a factor.
Money markets now price in around 76 bps of further tightening by the end of 2027, compared to roughly 67 bps before the decision. They now see a 50% chance of a hike in December, up from around 30% before Thursday's move.
Expert Commentary on Future Rate Hikes
"You've got a dissent for a larger hike, Bailey saying very clearly that more rate hikes will be required if energy prices persist, (that is to) some degree justifying pricing that's in the market for further hikes," said Michael Metcalfe, head of macro strategy at State Street.
Metcalfe said he expected at least one more increase.
"It's a question of how many times," he said. "That's going to be the question that will drive sterling and interest rate markets in the coming weeks."
Uncertainty Amid Global Events
Impact of Oil Prices and Geopolitical Tensions
OUTLOOK MURKY AS OIL PRICES FALL
The BoE joined the US Federal Reserve and European Central Bank in hiking borrowing costs in response to the energy supply disruptions stemming from the Iran war.
Bailey said the rate rise should not be seen as the first in a sequence of hikes. "But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase," he said.
The pound was little changed after the decision at $1.347, while Britain's FTSE 100 stock index pared its gains to trade 0.3% higher.
US Elections and Market Sentiment
The outlook for global rates has been complicated by Tuesday's US midterm elections, which delivered a rebuke to President Donald Trump and his war on Iran.
Oil prices are down around 16% this week as markets bet the election will increase pressure on Trump to end the conflict.
Performance of UK Financial Markets
British financial markets have fared well in recent weeks. Bond yields have fallen from multi-decade highs while stocks and sterling have risen amid better-than-expected economic growth.
British finance minister John Healey delivered a muted budget last week that reassured bond markets.
The Bank of England’s trade-weighted measure of the pound hit its highest since 2016 earlier on Thursday.
Analyst Perspectives and Future Risks
Yet, analysts stressed an uncertain outlook.
Potential for Further Rate Hikes
"If the Middle East crisis re-escalates into year-end – as it may well do – then a December hike clearly can’t be ruled out," said ING developed markets economist James Smith.
(Reporting by Harry Robertson and Darshan Kumar R; Editing by Amanda Cooper, Dhara Ranasinghe, Alexandra Hudson)