Traders Keep Hope of BOE Rate Cuts Alive After Softer Inflation
(Bloomberg) — Traders added to the amount of interest-rate cuts they expect from the Bank of England this year after inflation came in lower than expected, reversing moves spurred by concerns that global price pressures remained persistent.
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The market is now wagering on around 70 basis points of reductions in 2024. That’s back in line with pricing on Tuesday, before an unexpectedly strong US inflation reading forced traders to aggressively pare bets on how much easing central banks stand to deliver.
They also brought forward the timing for the first expected quarter-point reduction by one month to August given the more benign outlook. UK consumer prices rose 4% in January compared to a year earlier, less than 4.1% forecast by economists.
“These sorts of prints give us and the markets more conviction about the direction of travel,” said Matthew Landon, strategist at JP Morgan Private Bank. “That will likely support UK bond markets and keep some pressure on sterling over the near-term.”
Sterling traded as much as 0.4% weaker at $1.2536 as the market adjusted its expectations. Two-year gilts rose the most in nearly two months, with yields down as much as 14 basis points at 4.57%.
Still, some strategists said Wednesday’s release was not enough to materially change the longer-term outlook. Wage pressures in the UK remain strong and the pace of consumer price growth is still double the BOE’s target, warranting a more cautious approach from policymakers.
Despite the latest repricing, the scope for easing this year has rapidly shrunk. A month ago, money markets were pricing double the amount of cuts, with a first move as soon as May.
BOE Governor Andrew Bailey may shed new light on his outlook for monetary policy when he testifies to UK lawmakers later Wednesday.
“I’m not convinced the good news brings rate cuts forward by much,” said Hank Calenti, senior fixed income strategist at SMBC Nikko Capital Markets. “But the market may add to the total number of cuts expected over time.”
(Adds BOE Bailey’s scheduled speech in second to last paragraph. Earlier version corrected direction of UK two-year yield move in fifth paragraph.)
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