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Bank of England Prepares Markets For Tightening Policy

Posted: Thursday, October 21st, 2021

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The short term rates in the United Kingdom just experienced the fastest repricing in more than a decade. Bank of England’s Governor suggests monetary policy tightening might come sooner than the market expected.

Suddenly, it is not just the United States that moves fast on the monetary policy front, but the United Kingdom too. In a move that surprised financial markets participants, the Bank of England, through its Governor’s voice, suggested over the weekend that the monetary policy might tighten sooner than the market expects.

Norway and New Zealand have already raised their interest rates from the pandemic lows. Is it time for the U.K. to do the same?

It appears that the markets believe so, at least if we judge by the U.K. short rates (2y) repricing.  It is the fastest in more than a decade, and now the markets have 100% priced in a hike in December 2021, while a hike at the November 2021 meeting is credited with a 50% chance.

Bank of England Tightening


Upcoming U.K. Inflation Data Is Key

The U.K. September inflation data is due out tomorrow. The market expects inflation to remain stable, at 3.2% YoY, but the risks are tilted to the upside. With more and more people throwing in the transitory towel, the transitory vs. permanent inflation debate is about to come to an end.

Because the Bank of England has a mandate to keep inflation close to its 2% target, the more inflation rises, the bigger the pressure on the bank to tighten the policy. If tomorrow’s inflation data exceeds the forecast, investors will take it as a confirmation that the Bank of England will start to tighten its policy.

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