Traders are reducing their expectations on Bank of England rate hikes in the coming year, as fears of new Covid restrictions outweigh inflation concerns.

Following Prime Minister Boris Johnson's warning that the UK is facing a "tidal wave" of omicron infections, money markets are betting that the central bank's key rate will climb to 1% by 2023. Just over three weeks ago, traders predicted borrowing costs would reach around 1.25% by the end of next year.

Even before the omicron wave, some central bank officials and many economists warned that betting on rate hikes in 2022 were too aggressive. BoE Governor Andrew Bailey stated in November that such actions will result in inflation falling below the central bank's objective of 2% by the end of the projection year. He stated that he would "caution against" such views.

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Traders have increased their wagers on the BoE tightening policy in recent months, with consumer price rises in October reaching their fastest in a decade. The BoE is expected to raise borrowing costs by February, four months ahead of its US counterpart and well ahead of the European Central Bank.

The BOE has previously indicated that once its key rate reaches 1%, it will consider selling the bonds it owns directly.

While concerns about the omicron variant have driven UK markets in recent weeks, concerns about inflation haven’t dissipated. Over the next ten years, one measure of expectations is expected to average 4.18%, the highest in a quarter-century.

Unlike the BoE, the ECB is only anticipated to hike its deposit facility rate by 10 basis points by 2023.