Money markets priced a terminal policy rate of 6.25% in December, according to interest-rate derivatives, which implies one-and-a-quarter points of further tightening. The repricing comes after officials accelerated the pace of increases this week in the face of faster-than-expected inflation. 

The last time the BOE’s key rate was at that level was in 1998. 

After a year and a half of rate increases, UK inflation remains well above the BOE’s 2% target, bolstering the case for more aggressive action. The move on Friday was compounded by a string of data showing retail sales increased unexpectedly and price pressures in the service sector remained strong despite a slowdown in the pace of growth.

That points to a wage-price spiral that could force the BOE to stick to its aggressive tightening path, heaping even more pressure on the economy. While BOE governor Andrew Bailey said on Thursday he doesn’t want to trigger a recession, he added that policy makers will do “what is necessary to bring inflation down to target.”

“The risks remain skewed to further hawkish intervention,” said BNP Paribas analysts including Chris Lupoli. The half-point increase by the BOE Thursday “suggests a lower threshold to ‘front-load’ pain than we had anticipated”.

Figures earlier this week showed inflation stayed at 8.7% in May, the fourth consecutive month of stronger-than-expected data, spurring the repricing in the rate outlook. About a month ago, investors were betting the BOE’s benchmark would peak below 5%.

The latest moves will intensify the worries among mortgage borrowers, many of whom may have to cut spending elsewhere to cover higher interest costs. About 2.4 million homeowners are due to refinance by the end of 2024, of which 800,000 will do so in the next six months, according to UK industry data.

To be sure, the aggressive market pricing is also triggering scepticism from some. Andrew Sentance, a former UK ratesetter who has criticised officials for failing to rein in inflation more quickly, said investors are “jumping the gun” by anticipating the key rate will soar to 6%. 

The rate forecasts of most economists have trailed market expectations throughout the BOE’s tightening cycle. A survey published earlier this month before this week’s events saw the central bank’s key rate peaking at 5% this year, a level it has now reached. 

“The visibility on the end point of this cycle clearly remains very low,” said Morgan Stanley analysts including Bruna Skarica. “The BOE’s appetite to push back against – or manage – market pricing is now clearly nonexistent.” DM