Traders expect another rate hike on Thursday - Intertrader

Traders are expecting another increase in UK interest rates when the Bank of England’s Monetary Policy Committee meets on Thursday, according to online trading firm Intertrader.

Shafiq Shabir, head of Electronic Trading at Intertrader, said in a note on Monday that traders expect the Bank of England to raise the benchmark borrowing rate to 0.5%, representing the second UK interest rate increase in a little over a month.

Shabir said: “Traders are betting the Bank of England will again raise interest rates this Thursday, which, if realised, would make it the first back-to-back hike since 2004 following December’s shock decision.” 

The Bank of England MPC voted on December 16 by a majority of 8-1 to increase the Bank rate by 0.15% to 0.25%. Since then the Office for National Statistics said on January 19 that UK inflation hit 5.4% in December, its highest level for 30 years.

Shabir said: “Pressure has mounted on Threadneedle Street to act once again after December saw consumer prices unexpectedly soar by 5.4% year-on-year, with inflation at a near 30-year high. Markets have since priced in a 25bp rise, bringing rates to 0.5%.

“This time round, the arguments for and against rate rises seem far less evenly balanced, with public concerns regarding the cost of living crisis intensifying whilst the economic hit of Omicron continues to recede. More interest rate rises seem inevitable to combat rapidly spiralling inflation, so the question is whether the Bank will risk being seen to drag its feet,” Shabir added.

The Intertrader electronic trading head continued that similar pressures are building in the US.

“Officials on the other side of the pond have also endorsed imminent intervention, with Fed Chair Jay Powell last week all but confirming a hike at the US central bank’s next meeting in March. The jury is out on whether this will be quick enough action to curb inflationary pressure, but given the market’s reaction to the Fed’s plans, we can expect some choppy waters as central banks chart a new monetary policy course this year” Shabir added.

Interest rate derivatives markets have been buoyant for more than a year now.

Chicago exchange CME Group set on Wednesday last week a new record for trading futures that reference the US alternative to Libor.

Catherine Mann, a member of the MPC, said last week wage and price pressure in the UK will likely continue into 2023.