LONDON (Reuters) - Investors trimmed their bets on the peak for British interest rates on Thursday after the Bank of England told them their expectations were too high, as it raised borrowing costs by their most since 1989.
The BoE increased Bank Rate to 3% from 2.25% even as it said Britain's economy might not grow for another two years, a slump longer than during the 2008-09 financial crisis.
Short-dated gilts outperformed against similar debt in other major government bond markets as investors adjusted to BoE Governor Andrew Bailey's warning that rates would go up by "less than currently priced in financial markets".
But the overnight index swaps market now shows a peak of around 4.7% in September this year, down a touch from almost 4.75% before the BoE's interest rate decision
"We think the BoE expects the peak in Bank Rate to be some way below the 4.75% implied by market pricing yesterday," said Andrew Goodwin, chief UK economist at consultancy Capital Economics.
The market pointed to a roughly 95% chance of a further 50 basis-point interest rate hike at the BoE's next policy announcement on Dec. 15, with a 5% chance of a smaller 25 bps increase.
Long-dated gilt yields rose sharply and by a similar extent to yields for German, French and U.S. bonds.