Traders are betting that the Bank of England will hike interest rates again next month in order to curb inflation, which is running at its fastest rate in 30 years.
Money markets increased rate-hike bets to price in a quarter-percentage point increase in February, bringing the bank rate to 0.5%. They also expect the rate to rise to 1% in June from August previously.
The repricing comes after Federal Reserve Chair Jerome Powell supported interest-rate hikes in March, fuelling speculation about more aggressive tightening than previously expected. In the UK, consumer prices unexpectedly rose 5.4% YoY in December, putting pressure on officials to act.
The move would come following a surprise 15-basis-point raise in December, marking the first back-to-back hikes since 2004. It would also allow the BoE to begin shrinking its balance sheet by ceasing the reinvestment of expired bonds, beginning with 28 billion pounds ($37.6 billion) of gilts maturing in March.
While the BoE's rate hike in December surprised economists and traders, expectations for further monetary tightening are building as the outlook for consumer prices worsens. Investors anticipate that a rate hike in February will be followed by three more hikes by the end of 2022, bringing the key rate to 1.25%.