November 30, 2021

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U.K. Inflation Wagers Hit Highest Since Before BOE Independence

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By Greg Ritchie

(Bloomberg) —

The cost of hedging against inflation in the U.K. over the next decade rose to the highest level in 25 years amid mounting concern over price pressures building in the economy.

The so-called 10-year breakeven rate climbed as much as 10 basis points to 4.25%, the highest since 1996. That predates the Bank of England’s independence in 1997, when central bankers were given sole discretion for setting interest rates to meet an inflation target. 

The BOE’s chief economist Huw Pill told the Financial Times inflation may surpass 5% in the coming months — that’s a full percentage point more than the bank’s last forecast in September. Consumer prices rose 3.1% last month, holding near the fastest pace in more than nine years. 


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The gauge is derived from the difference between conventional gilt yields and those linked to inflation. Along with expectations for price increases, it often reflects a premium pension managers are willing to pay to shield their liabilities — spanning decades into the future — against inflation. 

Pension Demand

Demand for long-dated linkers will probably continue to outstrip supply, according to analysts including Mandeep Jagpal at RBC Europe Limited.

The deteriorating inflation outlook has spurred markets to pull forward expectations for monetary tightening aggressively over the past month. Some investors expect the BOE will raise rates as early as November. 

It comes amid a challenging backdrop for much of the global economy, which is grappling with supply shortages and surging energy prices as the world emerges from the pandemic. 


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A gauge of 10-year inflation expectations in Germany climbed toward 2%, a level last breached more than a decade ago, while the equivalent metric in the U.S. jumped to the highest since 2012 this week.

Five-year, five-year inflation swaps in the U.K. — a measure of expected price increases over the second half of the next decade — are set to close above 4% for the first time since 2009.

Payouts on inflation-linked gilts are currently tied to the Retail Price Index, rather than the Consumer Price Index targeted by the BOE. During the last 12 months, RPI inflation has averaged more than one percentage point above CPI.

©2021 Bloomberg L.P.



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Bloomberg News

2021-10-22 06:32:16

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