Sterling money market rates eased on Thursday after the Bank of England held interest rates, and analysts said the move was an opportunity to price in a more aggressive future rates path than currently expected. Markets anticipate UK interest rates will rise from a record low 0.5 percent by summer, and had seen an outside chance of a hike on Thursday.
With inflation having already surged to 4 percent, twice the central bank's target, a rise in June is almost fully priced in, with many seeing a move as soon as May. Short sterling contracts ticked higher after the BoE decision, a move analysts suggested using to set new positions that reflect policymakers' growing nervousness about inflation.
Benchmark three-month sterling Libor rates were unchanged at 0.80813 ahead of the BoE meeting. Equivalent euro rates were broadly steady at 1.12813 percent The European Central Bank gave a strong hint last week that it would raise rates next month, causing a marked flattening of the eurozone rates curve.
The 2/10 UK yield curve is currently at 233 bps, from around 214 bps two weeks ago. Markets unwound some UK rate hike expectations when the BoE held rates last month: the December 2012 short-sterling contract has risen 35 ticks since then for example, pushing implied yields lower. Markets are pricing in two UK rate hikes by year-end which would take interest rates to 1.0 percent. In the eurozone, the 2/10 yield curve has flattened around 10 basis points in the last week, and around 45 basis points since mid-February, as markets have moved to price in three interest rate hikes this year.
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