Pound rises again along with government borrowing costs as investors bet on further rate hikes
- Sterling surpassed $1.28 against the dollar for the first time since April last year
- It completed the pound’s biggest weekly gain in six months
- Returns on two-year gilts came within a whisker of 5% for the first time since 2008
The pound rose again yesterday along with government borrowing costs as investors increased their bets on further rate hikes.
With the Bank of England widely expected to raise rates to a 15-year high of 4.75% next week, the pound rose above $1.28 against the dollar for the first time since April last year.
It completed the pound’s biggest weekly gain in six months after trading around $1.25 at the start of the week.
Yields on two-year government bonds – a key driver of mortgage rates – also hit 5 percent for the first time since 2008.
Two-year bond yields are now higher than they were in the wake of the Liz Truss mini budget in September, driving up the cost of borrowing for government, households and businesses.
Flag Day: Sterling surpassed $1.28 against the dollar for the first time since April last year
Philip Shaw, an economist at Investec, said financial markets “have had a massive panic attack over the past month” as inflation remains stubbornly high.
Investors are betting that interest rates will continue to rise this year to at least 5.75 percent and possibly as high as 6 percent — a level not seen since 2001.
That would mean misery for millions of households with mortgages. Laith Khalaf, head of investment analysis at AJ Bell, said “alarm bells [are] ringing in the market’.
He added: “The Bank of England is caught between a rock and a hard place as it must choose between pushing more mortgage borrowers to the brink or letting inflation run wild.”
Returns on British pounds and bonds have risen sharply since official figures last month showed inflation of 8.7 percent, which was higher than expected.
The rally picked up steam this week as the Office for National Statistics reported wages were 7.2 percent higher than a year ago – the strongest increase ever recorded outside of the coronavirus pandemic.
The figures fueled expectations that the Bank will have to continue to raise interest rates in the coming months – starting next Thursday.
Nicholas Rees, foreign exchange analyst at Monex Europe, said expectations for interest rates “flirt with a final peak closer to 6 percent.”
He said: “Markets, in our view, have become more comfortable with the idea of a higher final rate. This shift has provided modest support to the pound over the course of the week.”
All eyes will be on the latest inflation figures, which the ONS will publish on Wednesday ahead of the Bank’s announcement.
The Bank has raised interest rates from 0.1 percent in December 2021 to 4.5 percent.
Khalaf said: “The market is now firmly pricing in a rate hike at the MPC meeting in June, and four more rate hikes after that, bringing us to 5.75 percent. A few aggressive comments from the Bank of England, or uglier inflation numbers, could easily raise those expectations to 6 percent.”