David Milliken

LONDON, (Reuters) – Investors have lowered their expectations of future Bank of England rate increases this year. This was after the BoE raised its interest rates on Thursday, but softened its language regarding further tightening.

At three consecutive meetings, the BoE raised interest rates. This brings Bank Rate to its pre-pandemic levels of 0.75%. It changed its guidance on Thursday to indicate that further tightening might be necessary, but not “likely”, as it did in February.

The BoE stated that while Russia’s invasion in Ukraine is likely to lead to an increase in commodity prices, this could also cause inflation to rise higher than expected. However, there are increased risks of economic recession.

Contrary to February’s vote, no member of the Monetary Policy Committee voted in favor of a 50-basis point increase. Deputy Governor Jon Cunliffe was opposed to any such change.

A note was sent out by Robert Wood, Bank of America economist and Agne Sterngeryte, bond strategist at Bank of America (NYSE) to clients.

They stated that they intended to end market speculations about whether the BoE would increase rates by half of a percentage point in future meetings.

Four out of the nine policymakers who voted last month for this move to curb inflation expectations – more than any rate rise by the British central banks since 1997, when it became operationally independent.

The yields on two-year gilt that is sensitive to interest rates reached an all-time high of 1.472% in the moments preceding the BoE announcement, but dropped 20 basis points later.

The two-year yield at 1659 GMT was 10 basis points less than Wednesday’s close of 1.29%.

This intra-day decline was the most significant in 2-year yields since any BoE announcement. It was more severe in November when investors expected the BoE’s tightening of policy. And it also dropped in March 2020, when the BoE issued an emergency order to purchase 200 billion dollars in bonds as COVID-19 became a pandemic.

Benchmark 10-year gilt yields dropped 6 basis points on the same day to 1.57%.

The financial markets believe that there is a 91% chance the BoE will increase rates to 1% in May, when inflation will be at 8%. There are 73% chances that they will rise to 2% before the end of this year.

Markets had already fully priced in rate increases of 1% and 2% for May and December. A 50-basis point rate increase was also priced into the market ahead of the meeting.

Samuel Tombs, Pantheon Macroeconomics, stated that the market’s interest rates expectations were being reshaped for six months. This was in contrast to the past ten years.