Traders bet BOE will cut rates before year-end to shore up economy

TRADERS are betting that the Bank of England (BOE) will reverse course and cut its key interest rate later this year to shore up a flagging economy.

For the first time since last ugust, money-market wagers show that a quarter-point rate cut is fully priced in by year-end. A half-point hike from the BOE next month is still almost considered a done deal, with traders betting that rates will continue to rise before peaking around 4.5 per cent in the summer.

The repricing comes after a string of economic data pointed to growth stalling and inflation easing, and shows that the market is beginning to doubt that the UK central bank will be able to keep rates that lofty for long. The bank’s policy rate currently sits at 3.5 per cent, the highest in more than a decade.

“We are turning more positive on the economic prospect for Europe, but still remain negative on the UK,” said Mohit Kumar, a rates strategist at Jefferies. “For the BOE, even if we get a 50-basis-point hike in February, it would be a dovish 50 basis points.”

Figures released on Wednesday (Jan 25) revealed that UK factory price inflation rose at the slowest pace in almost a year, following separate releases on Tuesday that signalled weak services-industry sentiment and factories curtailing production at record rates.

The end of hiking cycles is coming into sight for the central banks of many developed economies, prompting speculation from market participants regarding the likely trajectory of policy beyond the peak rate. Economists have argued that the BOE may be slower to cut rates versus peers, with factors including a scarcity of workers that is keeping inflation “sticky”.

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The bets on rate cuts helped UK bonds outperform their German equivalents for a fifth session, with yields on 10-year gilts down seven basis points at 3.2 per cent. The BOE is scheduled to meet next week, alongside the US Federal Reserve and European Central Bank. BLOOMBERG