Investors should start preparing for higher U.K. borrowing costs, even if they take a while to materialize.
That’s the view of strategists at UBS Group AG and NatWest Markets, who recommended positions that would benefit from an increase in interest rates in a year or two.
While the Bank of England has signaled it will continue to support the economy with record-low interest rates and 150 billion pounds ($209 billion) of bond buying by year-end, the success of the U.K.’s vaccination drive has super-charged the recovery and plans for a full reopening in June look to be on course.
A market measure of price increases climbed to a decade-high last month. Any further rise in inflation expectations could prompt the Monetary Policy Committee to take stronger steps to control rising prices once the dust has settled, wrote John Wraith, head of U.K. and European rates at UBS.
“In due course, the MPC will raise rates materially faster than is currently priced in, should inflation dynamics require them to do so,” said Wraith, adding that a further material rise in rates in one year “could be imminent.”
Position for a possible 40-basis-point BOE rate hike in 2023, says NatWest Markets