Bailey's Warning: High Energy Costs Spark Rate Hike Expectations

Bank of England Governor Andrew Bailey has laid the groundwork for a rate hike as high energy costs put immense pressure on the Monetary Policy Committee (MPC) to abandon its wait-and-see posture. The UK's current energy crisis will only make it harder for the MPC to maintain this stance, according to Bailey.

UK bond yields are at multi-decade highs, with the two-year bond yield sitting at 4.86%. Expectations of a higher Bank Rate feed into longer-dated bonds, including the mortgage-relevant 5-year bond, which reached its highest level in 18 years earlier in September at 5.35%.

Market pricing shows traders are positioned for four to five quarter-point (25 bps) rate hikes over the next year. Only two of the four internal members currently voting to hold need to switch for a November hike to carry, and Lombardelli and Breeden have signaled they may do so.

Investment bank analysts have moved decisively behind a November move, with MUFG expecting 25bp rate hikes in November and February, taking Bank Rate to 4.25%. Oxford Economics says a November hike now looks almost certain, with further increases likely in December or February.