THE Bank of England (BOE) was the first major central bank to start raising interest rates. Money markets are betting it may be the last to stop.

Strong labour-market figures on Tuesday (Jun 13) sparked big moves in bond markets, with two-year gilt yields jumping to the highest since 2008. They surged 26 basis points, the most since Liz Truss’s short-lived premiership.

Alongside that, traders dramatically reassessed the UK rate outlook and are now pricing a more than one-in-three chance that the BOE will lift its benchmark to 6 per cent by early next year to tackle the post-pandemic inflation surge.

That level, not seen since the early part of the century, would heap additional pressure on UK borrowers, particularly mortgage holders, potentially exacerbating a housing slowdown.

The BOE’s first rate hike came at the end of 2021. It beat both the Federal Reserve and European Central Bank (ECB), which followed three and seven months later, respectively. Despite more than four percentage points of increases since then, which lifted the benchmark to 4.5 per cent, continued worries about price pressures mean tightening wagers continue to build.

The data on Tuesday showed faster-than-anticipated wage growth and lower unemployment. Hours later, new BOE rate setter Megan Greene joined policymaker Catherine Mann in warning of the risks of persistent inflation and the difficulty of getting back to the 2 per cent target.

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The surprise April wage figures were partly driven by an increase in the national minimum wage, which won’t be repeated in later months. Still, according to Goldman Sachs analysts including Isabella Rosenberg, “we don’t think they can be ignored.”

“The BOE has much further to go than other central banks,” they said.

Higher Peak

BOE governor Andrew Bailey is trying to bring down the fastest-rising inflation in the Group-of-Seven economies, as the UK faces US-style labour shortages and comes out of an energy crisis that’s afflicted all of Europe.

High prices are continuing to be sustained in part by wage growth, as prospective employers face shortages on both ends of the pay scale and feel pressure to raise salaries. Bailey has vowed to stay the course on rate increases until he sees tangible signs that prices are cooling.

Markets expect that even once the BOE is done tightening, the first quarter-point cut won’t take place until late in 2024. That compares with pricing for a similar-sized Fed cut by February, with the ECB following in June.

The peak price is “well above the Fed and ECB, but crucially that peak is expected to persist for a year while the other central banks are priced to begin cutting”, said Gordon Shannon, a portfolio manager at TwentyFour Asset Management. “It’s not hard to picture the BOE being forced to take the base rate above 6 per cent as patience is lost with excessive core inflation and its insidious impact on growth becomes apparent.”

UK inflation slowed in April, though the 8.7 per cent reading was higher than economists had expected. The pressure on policymakers to get control of the situation will ramp up next week when the May numbers are published a day before the latest interest-rate decision. Markets are fully expecting a quarter-point increase and place a 25 per cent chance on a half-point hike.

“UK rates are now comfortably into restrictive territory,” and pricing “looks excessive”, James Smith, an economist at ING, wrote in a note. “However, today’s data are a reminder that the Bank of England is unlikely to rush into rate cuts, which we think are unlikely until this time next year.” BLOOMBERG