UK government bonds plunged and the pound rebounded as traders bet the Bank of England will keep hiking interest rates to 3% this year.
Two-year bond yields, the most sensitive to monetary policy, rose as much as 33 basis points, putting them on track at one point for their biggest jump since 2009. That came after BOE officials signaled they’re prepared to unleash larger hikes if needed to tame inflation, following a 25 basis-point rate rise to 1.25% that initially underwhelmed markets.
The surge in UK yields outpaced peers in the latest stage of a global bond selloff. While the BOE had been expected to remain cautious given the risk of causing a recession, money markets are now betting it will hike more than the European Central Bank and nearly as much as the Federal Reserve by year-end.
“The general messaging is inflation is rising, labour market and wage data not slowing as much as we thought and if it doesn’t slow they will need to move faster,” said Craig Inches, head of rates and cash at Royal London Asset Management. “What are they waiting for?”
Given there are four remaining BOE meetings this year, the market pricing of nearly 2 percentage points of rate hikes implies a series of 50 basis-point moves. A minority of BOE officials maintained a push for such a move on Thursday, in the wake of a surprise hike of that magnitude by the Swiss National Bank earlier in the day.
The prospect of more to come led to a recovery in the pound, trading up 0.6% at around $1.2250 after it initially fell more than 1%. The currency is still down nearly 10% this year given the uncertain economic outlook may keep a lid on how much the BOE can do.
“Overall, the Bank appears to have nudged open the door to 50 basis point hike if it feels the need,” Paul Dales, chief UK economist at Capital Economics, wrote in a note.