Markets reassess Bank of England rate cut bets

Bank of England Governor Andrew Bailey attends the Central Bank Monetary Policy Report press conference at the Bank of England, London, May 9, 2024. The Bank of England maintained The main interest rate hit a 16-year high on Thursday, but was hinted at falling over the summer, as British inflation continues to ease and the country appears poised to emerge from recession . (Photo by Yui Mok / POOL / AFP) (Photo by YUI MOK/POOL/AFP via Getty Images)

Yui Mok | Afp | Getty Images

LONDON — A flurry of comments from the Bank of England and better-than-expected economic growth figures have traders and investors scrambling to refine their bets on when the British central bank will start cutting its benchmark rate .

Investors were eagerly awaiting any indicators, hoping they would provide some guidance on when cuts might begin. The BoE’s benchmark rate helps assess all kinds of loans and mortgages in the country and has risen rapidly in recent years to help control high inflation.

As of Friday, markets were pricing in a roughly 48% chance of a rate cut in June, according to LSEG data, slightly higher than Thursday’s 45% chance.

Economists at Swiss bank UBS were among those who changed their minds on when the BoE might cut interest rates, saying they now expected the first rate cut to take place in June rather than August.

“The broader message and tone of the MPC was more dovish than we expected,” they said in a note released after the BoE’s latest interest rate decision.

The central bank said on Thursday it would leave interest rates unchanged for now, and stressed that a rate cut in June was by no means guaranteed. Two members of the Monetary Policy Committee voted in favor of a rate cut, one more than at the previous BOE meeting.

Bank of England's Andrew Bailey says a rate cut just before the UK election would not be a problem.

“June is not a fait accompli, but every meeting is a new decision,” BoE Governor Andrew Bailey said at a press conference after the meeting.

UBS cited changes to the Bank of England’s forward guidance, inflation expectations and Bailey’s comments regarding the impact of the increase in the national living wage on overall wage growth as reasons for its news expectations.

The Swiss bank now expects rates to fall in June, August and November, it said, by 25 basis points each.

'Beaten' UK housebuilders could get biggest boost from interest rate cuts, says strategist

The BoE’s interest rate decision was followed on Friday by the latest UK gross domestic product data, which showed the country’s economy grew higher than expected in the first quarter of 2024 .

GDP rose 0.6% compared to the 0.4% estimate, marking the first quarter since the end of 2021 with GDP growth above 0.5%.

The economy thus emerged from the technical recession into which it had entered after two consecutive quarters of contraction in the second half of last year.

“This is undeniably a strong figure that suggests the UK economy is recovering from its 2023 woes,” Nomura analysts said in a note published on Friday. This could suggest that inflationary pressures are persistent and that the economy is more resilient to higher interest rates, they noted.

The BoE warned on Thursday that indicators of persistent inflation “remain elevated”, but also said it expected inflation to move closer to the 2% target in the near term.

“This (GDP) release further reinforces our view that the Bank of England will need to maintain its restrictive policy for longer than markets expect to bring down inflation,” Nomura analysts said, adding that they expected the central bank to wait until August before cutting spending. rates.


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