Markets price in higher rates than previously forecasted

Investors are confident that UK interest rates will reach 6.5% by March next year, that would be the highest level since 1998. This will burden mortgage borrowers further and potentially tip the UK into a house price correction and maybe even a significant downturn.

The peak in UK interest rates priced by swaps markets has risen from 5% in May this year to 6.25% now after the Bank of England unexpectedly raised rates to 5% in June.

UK bond yields are also at the highest rates since 2007 – the cost of servicing government borrowing means there will be further pressure on spending, meaning the Chancellor may have to make some unpopular decisions before the next election.

Bank of England governor Andrew Bailey is concerned about the possibility of raising interest rates further but is left will little choice but to do just that until he can get a grip on the inflation issue. GBP has weakened slightly in the last couple of weeks from a peak of 1.28 in June to around 1.27 currently.

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