Traders Raise Bets on Further BOE Rate Cuts After Surprise Hawkish Vote
Traders have increased expectations for additional interest rate reductions from the Bank of England (BOE) this year following the central bank's quarter-point cut to borrowing costs. Notably, two policymakers voted for a larger reduction.
Key Highlights:
* Money markets now fully price in two more quarter-point cuts and an 80% chance of a third, up from 40% pre-meeting.
* The British pound fell over 1% against the dollar to $1.2361, while UK bonds initially rallied before retreating.
* Despite policymakers signaling only two more reductions are needed to achieve inflation targets, the market focused on the unanimous vote for easing.
* Catherine Mann, previously known for her hawkish stance, surprisingly joined another official in voting for a half-point cut.
Market Expectations Shift
UBS macro strategist Emmanouil Karimalis suggests the dovish message from the BOE will likely lead to 1.25 percentage points of additional easing this year. This is driven by expectations of further inflation moderation and a weak growth outlook.
The 10-year gilt yield fell initially but later recovered. Karimalis anticipates the yield could reach 4.1% by year-end if the BOE signals more aggressive easing.
Hit to Pound Sterling
The pound underperformed its peers against the dollar after the latest BOE cut due to ongoing rate reductions diminishing its attractive yield. Traders also sold sterling against the euro, indicating potential for further downside for the UK currency.
Next Rate Cut Timeline
The market now considers May as the likely next cut. With a sluggish economy and falling inflation, traders are assessing whether an even earlier move is possible.