Pound Drop Pushes Bond-Market Inflation Outlook to One-Year High

  • Break-even rate rises on ‘hard Brexit’ concerns, oil prices
  • Inflation to climb ‘materially’ in coming months: UBS’s Wraith

Juckes: Pound's Fall All About Psychology at This Point

The pound’s newfound weakness is fueling expectations of higher inflation in the U.K.

The 10-year break-even rate, a bond-market gauge of expectations for prices over the next decade, climbed to the highest since the middle of last year as sterling reached its weakest level since 1985. A lower exchange rate, spurred by concern Britain is heading for a so-called hard Brexit, raises the prospect of higher import costs, while the jump in oil over the past week is also boosting the inflation outlook.

While sterling’s depreciation “is certainly helping the economy to find a new equilibrium,” the higher import prices it generates “mean inflation is likely to rise materially over the coming months,” John Wraith, head of U.K. rates strategy at UBS Group AG in London, said in a note on Monday. “Risks are for a weaker pound” assuming the Bank of England continues to press ahead with policy easing to help the economy, he wrote.

The 10-year break-even rate, derived from the yield difference between conventional government bonds and those linked to retail-price inflation, rose to 2.79 percent as of 12:15 p.m. in London. It touched 2.81 percent, the highest since June 2015. The measure has climbed almost 0.5 percentage point since Britain’s June 23 referendum vote to leave the European Union.

The pound fell 0.6 percent to $1.2764 and touched $1.2737, the lowest since 1985. It tumbled this week after Prime Minister Theresa May said she’ll trigger the formal process for quitting the EU by March and amid reports that financial services will get no special favors in her exit negotiations.

Crude prices have risen above $50 a barrel since OPEC’s surprise decision to trim output at a gathering in Algiers on Sept. 28.

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