Traders put off bets on UK interest rates reaching 1% due to ‘Omicron’

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Traders are reducing their expectations on Bank of England rate hikes in the coming year, as fears of new Covid limitations outweigh inflation concerns.

Following Prime Minister Boris Johnson’s warning that the United Kingdom is facing a “tidal wave” of omicron infections, money markets are betting that the central bank’s key rate will climb to 1% by 2023. Traders predicted borrowing costs would reach around 1.25 percent by the end of next year just over three weeks ago.

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Even before the omicron wave, some central bank officials and many economists warned that betting on rate hikes in 2022 were too risky. BOE Governor Andrew Bailey stated in November that such actions will result in inflation falling below the central bank’s objective of 2% by the end of the projection year. He stated that he would “warn against” such viewpoints.

“If the variation becomes a bigger influence, this repricing could extend,” said Rohan Khanna, a rates strategist at UBS Group AG.

Traders have increased their wagers on the BOE tightening policy in recent months, with consumer price rises in October reaching their fastest in a decade. The Bank of England is projected to raise borrowing costs in February, four months ahead of the Federal Reserve in the United States and well ahead of the European Central Bank.

The pound fell as high as 0.4 percent to $1.3222 as expectations fell, but the yield on 10-year benchmark bonds remained unchanged at 0.74 percent. The BOE has previously stated that once its key rate reaches 1%, it will consider selling the bonds it holds directly.

While concerns about the omicron variant have drove U.K. markets in recent weeks, concerns about inflation have not. Over the next ten years, one measure of expectations is expected to average 4.18 percent, the highest in a quarter-century.

Unlike the BOE, the ECB is only planning to hike its deposit facility rate by 10 basis points by 2023.

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