City traders’ interest rate expectations jumped again today, as fears grew that the Bank of England’s attempts to clamp down on inflation are failing.
Short-dated gilt yields continued their relentless march upwards, driven by expectations the Bank of England will raise rates higher and keep them there for longer. The two-year yield hit yet another 15-year high at 5.05% this afternoon, almost a third of a percentage point above the levels reached during the mini-Budget.
Three-year gilt yields rose to 4.9% and five-year gilts neared their own mini-Budget highs at 4.7%.
That’s likely to lead to higher mortgage rates, after data released today showed the average two-year fixed-rate deal crossed the 6% threshold on Friday and TSB became the latest lender to withdraw products today.
The picture could get significantly better or worse this week with two major economic events to come, starting on Wednesday when the ONS publishes inflation statistics for May.
Economists expect the rate of price rises to tick down slightly, to 8.5%, still miles ahead of the Bank of England’s 2% target and barely any lower than April’s 8.7%. The figure would also be well ahead of other rich countries, with inflation in the US at just 4% while it’s 6.1% in the eurozone.
More closely watched will be the core inflation reading, which strips out food and energy prices to create a picture of domestic inflation that depends less on weather or developments abroad. That is expected to remain at 6.8%, the highest rate since 1992.
Higher inflation figures would mean further interest rate hikes are likely, prompting traders to sell gilts, sending yields even further upwards.
With mortgage lenders using gilt markets to price their products, higher yields will likely mean even more mortgage pain.
Graham Cox, founder at SelfEmployedMortgageHub.com, said: “Let’s just pray the inflation figures on Wednesday are better than expected. If they are, rates may fall as quickly as they’ve risen over the past couple of weeks.
“If they’re worse, hold onto your hats.”
The Bank of England’s Monetary Policy Committee will then reveal its latest decision on interest rates on Thursday. With a 13th consecutive rate rise seen as a near-certainty, the question will be whether the Bank raises rates by a quarter of a percentage point to 4.75% as expected, or takes a more aggressive stance by hiking rates all the way to 5%.
The City will also scrutinise the comments accompanying the expected hike, looking for signs of what Threadneedle Street expects as the year goes on.
Justin Moy, managing director at EHF Mortgages, said: “We all hang on the words and actions of the Government and the Bank of England this week.”
The Bank is expected to keep raising rates as the year goes on, with markets pricing in a two-in-three chance that rates peak at 6% or higher. But many economists are more optimistic believing recent hikes are only just starting to have an effect on the economy, as the prevalence of fixed-rate mortgages has delayed their impact.
James Smith, developed markets economist at ING, sees rates peaking at 5% instead.
He said: “The impact of past rate hikes is only now beginning to bite as a greater number of mortgage holders refinance.
“We have strong doubts that the BoE will take rate hikes as far as markets expect.”
