UK traders are betting on two BOE rate hikes in 2022

London

MONEY markets traders are pricing in tighter monetary policy from the Bank of England (BOE) as inflationary pressures in the economy build.

They now see a quarter-of-a-percentage-point increase to the BOE's key rate by December 2022, on top of a 15-basis-point hike that was already priced for May. That would take it to 0.5 per cent by the end of next year from 0.1 per cent currently.

Bets were brought forward after data on Wednesday showed UK inflation surged more than expected to the strongest pace in more than nine years, while UK company payrolls climbed above its pre-pandemic level in August.

The shift in market expectations also follows a change in forward guidance from the BOE last month, where policymakers said they now foresee some "modest tightening" over the next three years.

Last week, BOE governor Andrew Bailey said he is among officials who think a minimum criteria for tighter UK monetary policy has been met.

The BOE will "be focused on the medium-term outlook for prices and the labour market which, as seen in yesterday's jobs market report, is holding up better than feared", said Dean Turner, an economist at UBS Global Wealth Management.

"These will keep the Bank of England in a hawkish mood, laying the ground for a rate hike in the first half of next year."

It is a sharp turnaround from the second half of last year, when traders were pricing in rates as low as minus 0.1 per cent as the economy sputtered.

They only removed bets on further loosening in February, when policymakers stressed that negative rates are not imminent amid the UK's successful vaccine rollout.

While the central bank traditionally shifts its key interest rate by multiples of 25 basis points, it last cut rates by 15 basis points in March 2020, at the height of the coronavirus pandemic. If officials wanted to raise rates, a move back to 0.25 per cent is seen by strategists as the likely first step. BLOOMBERG