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London Markets: No Barbie Dream House or turkey for Christmas, but U.K. may get an interest rate hike

With shortages forecast for everything from toys to turkeys this Christmas, some beleaguered Brits may be pining least for an interest rate increase. But a surge in U.K. bond yields was indicating that’s exactly what they may be getting.

The yield on the U.K.’s 2-year gilt 

jumped 13 basis points, to 0.71%, after Bank of England Gov. Andrew Bailey said on Sunday the central bank will have to act to curb inflationary pressure. The yield on the 10-year gilt

rose 4 basis points to 1.149%.

“Monetary policy cannot solve supply-side problems — but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,” Bailey reportedly said during panel discussion organized by a consulting group, the Group of 30.

“And that’s why we at the Bank of England have signaled, and this is another such signal, that we will have to act,” he said. Bailey’s comments come on the heels of hawkish comments seen in recent weeks by he and others on the bank’s monetary policy committee.

Labor market shortages and higher energy costs have helped drive up inflation, with August consumer prices clocking in at the fastest rate in 24 years.

Bailey’s comments were not, however, driving up the pound
which was weighed by dollar strength. The next U.K. interest rate decision is due Nov. 4, a day after the Federal Reserve is expected to announce its own stance on tightening interest rates, Laith Khalaf, head of investment analysis at AJ Bell, noted to clients.

“Guessing how nine people in a room are going to vote on interest rate policy isn’t based on any science, but a rate increase in November would give the impression of a pretty panicked knee-jerk reaction to events unfolding in the energy market,” he said, adding that a December hike may be more likely with the bank needing to consider lots of data in between.

James Smith, developed market economist at ING, believes markets are overestimating a rapid succession of interest rate increases because “any tightening will also involve reducing the size of the BoE’s balance sheet. At most, we expect two rate increases by the end of 2022.”

In a note to clients, Smith also rejected the idea the U.K. is more vulnerable to a long-lasting inflation problem than the U.S., saying higher British electricity and imported goods prices will probably mean less consumer spending elsewhere. The U.K. also began withdrawing its fiscal support in May, whereas the U.S. hasn’t yet started, he added.

The U.K. has been struggling with petrol shortages due to a lack of drivers, while the toy industry has predicted shortages of Barbie sets and coveted Paw Patrol figures for Christmas, alongside warnings of turkey shortages due to a lack of butchers.

Elsewhere, the FTSE 100

fell 0.6% to 7,187, with financials the best performers and the worst utilities. The biggest gainer was silver miner Fresnillo
which rose 3% after an upgrade to neutral by analysts at UBS, which said after several “years of poor operational performance that cause a derating in our view the risk of further disappointment is materially lower.”

The biggest faller was British Airways owner International Consolidated Airlines
which fell 4% amid concerns over rising COVID infection rates in the U.K. and fears that other countries may impose travel restrictions.

Other fallers included Premier Inn operator Whitbread

and luxury goods group Burberry

In the midcap FTSE 250
the bigger gainer was Playtech
which climbed 58% after the gambling-technology company said late Sunday it has agreed to a 2.1 billion-pound ($2.89 billion) takeover from Australian gaming content and technology group Aristocrat Leisure

through its Aristocrat (UK) Holdings unit.

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