The BoE rate hike bets increase after the latest UK PMIs as costs surge at a record pace

The Bank of England is seeing increased market pricing for near-term rate hikes following the latest UK PMI data, which showed input cost inflation surging at a record pace. The sharp rise in cost pressures has reinforced expectations that the BoE will need to maintain a hawkish stance to counter entrenched inflationary dynamics, supporting the pound and influencing short-term sterling interest rate derivatives. This repricing of rate hike probability is primarily transmitted through rate differential expectations, affecting GBP/USD and UK gilt yields, with front-end rates most sensitive. The surge in manufacturing and services input costs also raises concerns about margin compression and second-round inflation effects, increasing the risk of more aggressive tightening. Traders will closely watch the upcoming BoE minutes and the UK CPI report for confirmation of policymakers' response to the latest inflation signals.

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