Traders are ramping up bets on the Bank of England going a hiking spree this coming year.
The Bank will look through economic risks posed by the Omicron variant of coronavirus and lift rates above one per cent by the end of 2022, the first time that level has been breached since 2009 in the immediate aftermath of the financial crisis.
Markets are pricing in rates reaching 1.25 per cent by the end of next year.
The repositioning comes after the Bank shocked markets last week and raised interest rates for the time in over three years.
Officials on Threadneedle Street voted 8-1 in favour of lifting rates 15 basis points from a record low 0.1 per cent to 0.25 per cent.
If rates breach the one per cent mark, the Bank may start actively selling stock from its holdings of government bonds, known as quantitative tightening.
The UK’s economic trajectory has been muddied by the emergence of Omicron. However, three studies released yesterday examining the severity of the new strain indicated it is not as severe as the Delta variant.
Despite greater economic uncertainty, traders are betting the Bank will launch a course of rapid policy tightening to tamp down on the historically high cost of living, which hit 5.1 per cent last month, its highest level in over a decade.
The Bank has signalled its agitations toward inflation running away in the UK, which is being driven higher by swelling energy costs.
The Bank thinks the rate of price rises will hit six per cent next April due to Ofgem, the energy regulator, lifting the energy price cap.