“This Looks Like An Absolute Disaster”: UK Short-Term Yields Blow Up Most Since 2010 As Frantic Traders Front-Run BOE Rate Hikes

Frantic rates traders pulled forward rate-hike bets after BoE governor Bailey said over the weekend that the central bank “will have to act” on inflation. The move manifested in a huge spike in 2Y gilts, which rose as much as 17bps to 0.75%…

… the biggest one-day move since 2010, before easing a bit. Even more striking, 3-month sterling LIBOR soared by 7.9bps, the biggest one day surge since Lehman.

Besides the usual, and now daily, surge in commodities, a Friday report from Goldman predicted the BOE would likely raise rates in November.

“While we view it as a close call between a November and December lift-off, we think the November meeting is slightly more likely given it comes with a press conference and updated projections within the Monetary Policy Report,” Goldman Sachs economists wrote adding that they now expect 3 rate hikes at alternate MPC meetings, taking BOE’s benchmark rate to 0.75% by May, and 1% by the end of next year.

Not surprisingly, UK money markets reacted accordingly, and now see 36 basis points of BoE rate increases in December, while pricing 20 basis points of tightening next month. Traders are also now betting the BoE’s key rate will top 1% by August, an even more aggressive timeline than Goldman’s, from 0.1% currently.

Needless to say, not everyone is happy with this development perhaps first and foremost Former Bank of England policy maker Danny Blanchflower (who last weekend suggested that the US is already in a recession), who said that lifting U.K. interest rates anytime soon would be “a terrible error.”

“I think they may go and do that, but it would be a very foolish thing to do, especially with what the data is doing and the chancellor is doing, but also the possibility and this is a distinct possibility that the U.S. is going into recession,” Blanchflower said on BBC Radio 4’s “Today” program on Monday quoted by Bloomberg.

“These seem very early days to be thinking that. The economy is very hard to understand right now. It looks to me as with every interest rate rise since 2008 that they have all been in error” he said, adding that “there’s lots of things to think about. We’ve just had a big furlough scheme, which means the labor market is very difficult to understand. We’ve had a very little bit of inflation. It looks terribly temporary”

“Think of an island if a hurricane hits it. The price of plumbers and roofers is going to rise. Once the adjustment takes place those prices are going to fall. These paths, these changes in inflation look to be enormously temporary. And any response by the central bank to those changes look to be a big error. It looks increasingly like 2008.”

His conclusion is probably not wrong: If the BOE raises rates now, “They’d probably have to reverse it quite quickly.” In fact, that may be just what central bankers are hoping for: to hike into a recession so they have justification to cut right after.

“This looks like an absolute disaster if the Bank of England did it. This looks like a terrible error.”

Maybe, but tell that to those who are about to spend a quarter of their paycheck on heating bills and gasoline.