Markets are now expecting Bank of England interest rates to reach a 25-year high of 6.5%.

The yield on short-dated government bonds increased to its highest level since mid-2008 on Thursday as financial markets gambled that the Bank of England will increase interest rates to a 25-year high of 6.5% early next year, up from the previously anticipated top of 6.25%.

Rate futures indicated that there is a roughly 2 in 3 possibility that the BoE will have hiked rates from 5% to 6.5% or higher by its meeting in February 2024.

In a bigger-than-expected half-point rate increase last month, the BoE cited "more persistence in the inflation process" as justification.

A rise in gilt rates and rate expectations has not been stopped despite BoE Governor Andrew Bailey's more hawkish stance and remarks made last week.

On Thursday, Bailey stated that there was some proof that certain shops' overcharging was a factor in inflation. Prior to this, the BoE said that this was not common.

Forecasts made by economists have also increased, but more gradually. According to a Reuters survey released on June 26, rates will likely peak at 5.5%.

On Thursday, a BoE study revealed conflicting results about inflation stickiness. Businesses' predictions for consumer price inflation in the long term increased to a five-month high of 3.7%, considerably beyond the BoE's 2% objective, but their intentions to hike prices were at their lowest level in 15 months at 5.3%.

In contrast to a previous pattern where the largest swings have been for shorter maturities, gilt rates increased significantly across a variety of maturities despite the worse economic projection.

(Sources: investing.com, reuters.com)