Growing expectations of a second Bank of England rate rise next month pushed the pound to two-year highs against the euro as Boris Johnson played down the prospect of further restrictions to tackle the omicron variant.
The pound is now worth almost €1.20, its highest level since February 2020. Sterling also gained ground against the dollar as traders also bet against gilts amid expectations of further action from the Bank next month.
Two and 10-year British government borrowing costs rose to two-month highs as Mr Johnson said there was a “good chance” of getting through the latest Covid wave without tougher action.
Money markets are pricing in two 15 basis-point rate rises from Threadneedle Street by its March meeting and almost a full percentage point by the end of the year following its surprise move last month.
Meanwhile credit-hungry households have racked up the biggest rise in borrowing for more than a year and dug into pandemic savings, reinforcing expectations of further action.
The Bank’s latest figures for November showed households borrowed £1.2bn on credit cards and loans over the month, the highest since July 2020 when the economy reopened after the first Covid lockdown.
Households faced with rising prices and the looming Christmas season also saved much less over the month, with £4.5bn in deposits being the lowest since January 2020 and less than half the average of the previous 12 months.
The figures reflect a stronger month for retail sales – up 1.4pc during November – as shoppers began festive preparations early amid fears of empty shelves and supply shortages.
The relative resilience of consumers comes as surging energy bills are poised to push the Consumer Prices Index to a 30-year high of 6pc by April, fuelling concerns among the Bank’s rate-setters about inflation.
The Bank raised interest rates for the first time in three years in December, despite the emergence of the omicron variant set to slow the post-pandemic recovery as hundreds of thousands of people are forced to self-isolate.
Despite a likely slowdown in December and January, financial markets still expect a second rise in rates from the Bank in February from 0.25pc to 0.5pc, with borrowing costs of about 1pc by the end of the year.
George Buckley at Nomura expects the Bank to act. “When you have got [longer-term] inflation of 2.6pc if you do nothing, it strikes me that a 15 basis point rise to 0.25pc is not going to cut the mustard,” he said.