Traders Scale Back Bets on Further UK Rate Cuts After Inflation Surprise
Traders have reduced their expectations for further interest rate cuts by the Bank of England this year after a surprising rise in UK inflation. They now anticipate less than two more reductions through December.
Money markets are pricing in just 49 basis points of easing by year-end, the lowest level since January 31st, following the central bank's rate cut earlier this month. Data released on Wednesday revealed that consumer prices reached a 10-month high in January, creating a dilemma for the BOE as policymakers attempt to stimulate growth without fueling inflation.
The reduced expectations for rate cuts followed comments from the European Central Bank's Isabel Schnabel, who indicated that policymakers were approaching a point where they could pause or even halt further easing.
Since last week, when traders priced in a more than 50% probability of the BOE delivering three more 25-basis-point cuts this year, bets on further easing have declined significantly. Meanwhile, a growth report has exceeded expectations, making the case for further reductions less compelling, while data on wages and price pressures has come in slightly higher than anticipated.
UK gilts experienced a decline, with the 10-year yield rising 5 basis points to 4.61%, the highest level since January 29th. The pound, on the other hand, fell 0.2% to $1.2593.