Traders Raise Bets on Further Bank of England Rate Cuts

After the Bank of England (BoE) lowered interest rates by a quarter point as anticipated, with two members voting for a larger reduction, traders have increased their expectations for additional rate cuts this year.

Rate Cut Pricing

Money markets have priced in two more quarter-point cuts and an 80% chance of a third, up from 40% before the meeting. This represents a significant shift in market sentiment, reflecting the market's focus on the unanimous vote for easing among the nine-member Monetary Policy Committee.

Vote Highlights

Catherine Mann, a policy hawk who previously voted against rate reductions, surprised markets by joining another official in supporting a half-point cut. This suggests a growing dovish bias within the committee.

Impact on Markets

The pound initially fell 1.2% against the US dollar following the announcement but later stabilized. UK bond yields initially rallied before giving back some of their gains. The 10-year gilt yield dipped to a low of 4.38%, its lowest level in nearly two months, but has since risen slightly.

Economic Outlook

Market participants anticipate that the BoE will cut interest rates further this year, citing moderating inflation and a sluggish growth outlook. According to Emmanouil Karimalis of UBS, the central bank could ultimately deliver up to 1.25 percentage points of additional easing.

Pound Performance

The pound has underperformed its peers against the US dollar this year, hurt by ongoing rate cuts that have eroded its yield advantage. Traders have also sold sterling against the euro, suggesting further downside potential for the UK currency.

May Rate Cut Possibility

With the next BoE meeting scheduled in May, traders are considering the likelihood of an earlier rate cut given the sluggish economy and easing inflation. "The market will now be focused on whether March could become a 'live' meeting for another 25 basis point cut," said Craig Inches of Royal London Asset Management.