Sterling Money Market Turns Too Hawkish on BoE Rate Hikes

The sterling money market is pricing in more than four Bank of England rate hikes as oil trades around $100, but ING Think believes expectations have turned too hawkish, offering value further out the curve.

For every $10 increase in oil prices, the 2-year gilt yield rises by about 15 basis points. With Brent oil at $100, markets are pricing in more than four hikes from the Bank of England over the coming year, bringing SONIA to around 4.75%.

However, ING Think's economist does not expect the BoE to hike rates, and the central bank's communication is more dovish than market pricing. Second-round inflation risks are limited, as the labour market has already cooled significantly over the past year.