Market-based inflation expectations in the UK rose to the highest level in over a decade.
The so-called 10-year breakeven rate climbed by 3 basis points to 3.48 per cent, the highest reading since 2008. The gauge, which is derived from the difference between conventional gilt yields and those linked to inflation, has risen almost 50 basis points point so far this year.
The repricing comes before the Bank of England meets to set policy on Thursday. It follows record demand for a 10-year inflation-linked government bond last week, a sign that investors are scrambling to hedge their portfolio against the prospect of rising consumer prices.
“Sentiment is driving breakeven rates higher,” said Bob Stoutjesdijk, a Rotterdam-based fund manager at Robeco Institutional Asset Management, adding that breakeven rates, while “overstrecthed on a fundamental level”, can rally further as the economy reopens.
Financial markets the world over have been signalling that inflation may mount a comeback after months of ultra-loose monetary policy. The UK has been at the forefront of the resulting global bond sell-off, fuelled by the pace of the British vaccine roll-out and a recent hawkish tilt by the Bank of England.
While the UK’s rate of consumer inflation has held below the bank's 2 per cent annual target for 18 months, economists expect it to accelerate to just below that goal this year. That is raising the possibility that central bank officials could opt to tighten their monetary stance.
The BoE’s chief economist Andy Haldane said last month he sees a risk of UK inflation accelerating more than expected, warning fellow central bankers against being too relaxed about taming the rise in consumer prices.
Britain has the highest breakeven rate among Group of Seven nations, with the comparable US rate more than a percentage point lower at around 2.25 per cent.