U.K. Inflation Wagers Hit Highest Since Before BOE Independence




  • In Business
  • 2021-10-22 08:50:50Z
  • By Bloomberg

(Bloomberg) --

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The cost of hedging against inflation in the U.K. over the next decade rose to the highest level in 25 years amid mounting concern over price pressures building in the economy.

The so-called 10-year breakeven rate climbed nine basis points to 4.24%, the highest since 1996. That predates the Bank of England's independence in 1997, when central bankers were given sole discretion for setting interest rates to meet an inflation target.

The BOE's chief economist Huw Pill told the Financial Times inflation may surpass 5% in the coming months -- that's a full percentage point more than the bank's last forecast in September and three percentage points above its inflation target. Consumer prices rose 3.1% last month, holding near the fastest pace in more than nine years.

The outlook has spurred markets to pull forward expectations for monetary tightening aggressively over the past month. Some investors expect the BOE will raise rates as early as November.

The breakeven rate is derived from the difference between conventional gilt yields and those linked to inflation. It reflects expectations for price increases over the period, as well as a risk premium related to inflation uncertainty, liquidity and hedging flows.

Five-year, five-year inflation swaps -- a gauge of expected price increases over the second half of the next decade -- closed at 3.96% on Thursday, the highest since 2009.

Payouts on inflation-linked gilts are currently tied to the Retail Price Index, rather than the Consumer Price Index targeted by the BOE. During the last 12 months, RPI inflation has averaged more than one percentage point above CPI.

(Adds context.)

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