Key sterling-priced interbank rates rose to a 17-month peak on Wednesday on money market bets the Bank of England would have to hike interest rates sooner than expected after surprisingly high inflation data this week. Euro-denominated interbank rates extended their recent rise, reflecting a shift in expectation on interest rates after last week's warning from the European Central Bank on inflation, even though some policymakers have struck a more relaxed tone since.
While markets now expect the ECB to start raising rates by the turn of this year, UK interest rate swap markets are indicating the BoE will hike earlier after data showed inflation picked up in December to an eight-month high of 3.7 percent and well above the BoE's 2.0 percent target.
Overnight indexed swaps, which trade based on expectations for the key central bank rate, are pricing in a 70 percent chance of a 25 basis point move in May. The BOE's Monetary Policy Committee (MPC) has kept rates at a record low 0.5 percent for the past 22 months.
London interbank offered rates (Libor) for three-month sterling was set at 0.77313 percent from 0.77000 percent on Tuesday, according to the latest fixings by the British Bankers' Association.
Short sterling futures sold off after the data on Tuesday as the market priced in the shift in interest rate expectations. The December contract, for instance, has fallen to around 98.43 from a peak of 99.00 reached in October, pushing implied yields up. In euro-priced money markets, three-month euro Libor was fixed up at 0.94750 percent from 0.94438 percent while the equivalent Euribor rate rose to 1.014 percent from 1.012 percent.
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