Traders need a green light from BoE to crank up rate bets

The Bank of England in the City of London. Traders are scaling back wagers on BoE rate hikes even as price pressures in the UK economy continue to build, a sign they’re looking for validation from officials before adding to their bets.

Traders are scaling back wagers on Bank of England rate hikes even as price pressures in the UK economy continue to build, a sign they’re looking for validation from officials before adding to their bets. Both labour market and inflation figures came in hotter than expected this week, which would in theory bolster the case for BoE tightening. Yet the market has unwound around 10 basis-points of rate increases priced in across the curve from a peak on Tuesday. The reaction speaks to how much is already baked into market expectations. To move the needle from here, central bankers in the UK may need to make an ultra-hawkish intervention similar to comments from Federal Reserve rate-setter James Bullard. While the BoE has not been active in guiding the market this year, policy hints could come as early as next week. Dave Ramsden – who voted for an unconventional half-point hike this month – will speak on Tuesday, while Ben Broadbent is among policy makers speaking at the Bank of England Agenda for Research (BEAR) conference. It “looks to be the last big event ahead of March’s meeting,” said Simon Harvey, an analyst at Monex Europe, who thinks hawkish short-term interest rate pricing is overdone. “Market positioning for a 50-basis-point hike was heavy leading into CPI and today’s quirks in the data didn’t exactly pose the most compelling case for adding to those bets.” The market currently sees the BoE raising rates to 2% by December, up from around 1.25% at the start of the year. The positioning was supercharged after four of the nine-member Monetary Policy Committee voted for a half-point increase earlier this month, with the market fully pricing such a move over the next two meetings. Those bets were scaled back on Wednesday, and now point to around 37 basis points of tightening in March. That’s even after data showed UK inflation unexpectedly accelerated for a fourth straight month in January. Traders betting on a faster pace of rate hikes have faced headwinds from BoE Governor Andrew Bailey and chief economist Huw Pill – both voted for a quarter-point rise this month – and who’ve been pushing back against the likelihood of larger hikes. While the market hasn’t heard from any official who voted for a 50-basis-point increase since the decision, the risk is if they indicated they’d do so again, it could trigger more tightening bets. Potentially more influential for the market would be an official who voted for a quarter-point rise signalling their openness to a larger increase in the coming months. Still, it remains a high-bar. Pooja Kumra, a strategist at Toronto-Dominion, says markets are ignoring the the fact that BoE will also be tightening policy by shrinking its balance sheet, limiting how much should be priced in terms of rate hikes for the year. For Stuart Cole, chief macro economist at Equiti Capital, the BoE has missed the opportunity to raise rates by 50 basis points. “If you look at the data between now and the meeting itself, it is hard to see anything that could make those five members change their minds,” he said.