Investors Bet On Bigger BoE Rate Hikes After Inflation Overshoot
British two-year government bond yields surged to their highest level since the depths of the global financial crisis almost 14 years ago as stronger-than-expected inflation data ramped up bets on further Bank of England interest rate hikes.
Annual consumer price inflation jumped to 10.1% from 9.4% in June, official data showed on Wednesday, above all forecasts in a Reuters poll of economists and its highest since February 1982.
Two-year gilt yields rose more than 29 basis points on the day to hit a peak of 2.441% at 0801 GMT, breaking past a previous high set on June 21 to reach their highest level since November 2008, and were trading at 2.415% at 0847 GMT.
Financial markets are pricing in a 98% chance that the Bank of England will raise its main interest rate by half a percentage point to 2.25% - which would be its second big rate hike in a row - at the end of its next meeting on Sept. 15.
"Today's inflation upside surprise, coming on the heels of a strong labour market report yesterday is likely to prompt another 50bp rate hike by the Bank of England at its next policy meeting," said Silvia Dall'Angelo, senior economist at investment bank Federated Hermes.
Markets were pricing in 200 basis points of BoE tightening by May next year which would mean Bank Rate peaks at 3.75%. On Tuesday markets had priced another 155 basis points of rate hikes by March 2023 when they were expected to peak.
Benchmark 10-year gilt yields were 13 basis points higher at 2.26%, and prices for British debt underperformed German and U.S. government bonds.
The gap between 2-year and 10-year gilt yields - sometimes viewed as a signal of recession - was its most inverted or negative on record at around minus 17 basis points, according to Refinitiv data going back to late 2010.
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