BoE rate-hike bets leap to 68 bps, approaching three quarter-point moves

Investors sharply raised Bank of England rate-hike wagers on Tuesday, adding 12 basis points of tightening to futures contracts in one session as global geopolitical tensions and UK political uncertainty both darkened the inflation outlook.

UK rate futures now point to about 68 basis points of BoE policy tightening by December, Reuters reported, up from roughly 56 basis points on Monday. The pricing brings market expectations close to three quarter-point rate increases. This marks a dramatic shift from weeks earlier, when traders expected the central bank to hold steady through much of the year.

Two shocks drove the move in UK rates. Escalating Middle East hostilities have lifted energy prices and disrupted supply-chain assumptions across European economies. Simultaneously, fresh Westminster political turbulence — including a cabinet reshuffle that removed two senior ministers — weakened the pound and added a fiscal-risk premium to the rates curve. Brent crude, the global benchmark, has risen roughly 8 per cent over the past three weeks.

The Bank of England’s position adds pressure. The Monetary Policy Committee held its Bank Rate at 3.75 per cent on 30 April, pausing after a 25-basis-point cut in March. The decision split the committee. Huw Pill, the BoE’s chief economist, voted for an immediate quarter-point hike — a stance that now looks prescient as markets price the path he argued for. The other eight MPC members voted to hold.

UK consumer price inflation stood at 3.3 per cent in March, more than a full percentage point above the BoE’s 2 per cent target. Services inflation, the measure the MPC tracks most closely to gauge domestic price pressure, has decelerated slowly, holding near 5 per cent. Headline CPI fell to 2.1 per cent in December before rebounding, reinforcing the MPC’s concern that the disinflationary trend stalled.

Inflation persistence concerns the central bank. Unlike the Federal Reserve, which faces an economy growing above trend, or the European Central Bank, which confronts near-stagnation, the BoE fights inflation with GDP growth already below 1 per cent. Core inflation, excluding volatile food and energy components, was 3.8 per cent in March. Wage growth, measured by average weekly earnings excluding bonuses, reached 5.6 per cent in the three months to February.

What analysts are reading

James Smith, developed-markets economist at ING, wrote on 1 May that a June rate hike became the bank’s base case. Smith noted the MPC’s April hold was a “close call” and subsequent wage and services inflation data would push the committee toward tightening. Markets have since priced even more tightening.

The 68-basis-point pricing implies the BoE would lift rates to roughly 4.43 per cent by year‑end from the current 3.75 per cent. Three 25‑basis‑point increments would mean hikes at the June, August, and November meetings. A fourth move remains unpriced but could emerge if inflation prints surprise to the upside through the summer.

Market reaction

Gilts sold off, with the two-year yield — the maturity most sensitive to BoE rate expectations — rising to its highest level since February. The move reverses the March-April rally in short-dated UK government debt, which priced a more benign rate path.

Sterling fell against the dollar despite rising rate-hike expectations, an unusual divergence. The decline reflects political uncertainty rather than repricing of monetary-policy credibility. The pound traded near $1.31, down roughly 0.4 per cent on the session.

What comes next

The MPC’s next decision is scheduled for 19 June. Policymakers will then have April CPI data and the latest wage growth and labour-market figures. If services inflation remains elevated and average weekly earnings exceed 5 per cent, the case for a June hike strengthens. The BoE’s May forecast, released with the April hold, projected inflation at 3.6 per cent by the fourth quarter — already above target, and a level the 68-basis-point pricing suggests markets doubt.

Geopolitics remains a risk. Further escalation pushing Brent crude above $100 a barrel would put the BoE in a difficult position — hiking into a supply-driven price shock monetary policy cannot directly address but must not ignore if inflation expectations de-anchor.

The rates market’s position is clear: the BoE is not done tightening. Three hikes by December is no longer a tail risk — it is the central bet.