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British households might have to cope with interest rates hitting 4% as soon as next spring as policymakers wrestle with out-of-control inflation.
That’s the view coming from money markets, where traders are ramping up bets on more aggressive tightening by the Bank of England. With the gas crisis worsening and winter just months away, there’s a sense that officials will have to send the economy into a deep recession to rein in inflation running at the fastest pace in 40 years.
Traders are now wagering on around 235 basis points of rate hikes by May, according to interest-rate derivatives tied to central bank decision dates. That’s the most this cycle and would be more than enough to take the key rate — currently at 1.75% — to 4%, more than a full percentage point more what was expected last month.
The rapid repricing comes as traders bet consumer costs will keep rising at a record pace, with Citigroup Inc. saying the headline rate will climb above 18% next year. The market is wagering the BOE will even leapfrog the Federal Reserve in raising rates, which has so far taken a more aggressive approach to fighting inflation.
Yet the pound has failed to capitalize on the prospect as the growth outlook dims, falling to $1.1718 on Tuesday, the weakest since March 2020. Five-year UK government bonds led a selloff across the region, with the yield rising to 2.50%, a level last seen more than a decade ago.
The BOE has hiked at six consecutive meetings and opted for a larger half-point hike most recently, its largest in over two decades.
(Adds latest market moves in fifth paragraph.)
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