Bets on UK rate cuts jump after surprise drop in growth
Traders ramped up bets on interest rate cuts by the Bank of England next year after soft economic growth data reinforced the view that policymakers won’t be able to keep monetary policy tight for so long.
Markets priced 100 basis points of monetary easing in 2024 for the first time in the current cycle, which would take borrowing costs to 4.25 per cent. Traders are betting on the first move coming in June.
The Bank of England may cut rates as soon as June next year. AP
The latest shift in pricing brings expectations for UK rates closer to those for the US Federal Reserve, which is expected to lower borrowing costs by at least one percentage point next year. The US central bank announces its policy decision before the Australian market opens on Thursday, with UK officials following later.
“The data ahead of the BoE decision tomorrow gives more argument to expect a cautious monetary policy committee message,” said Roberto Cobo Garcia, head of G10 FX strategy at Banco Bilbao Vizcaya Argentaria in Madrid.
The UK economy shrank more than expected in October, setting the stage for another quarter of stagnation that is widely forecast to persist through 2024.
At the same time, wage growth is slowing at the sharpest pace in almost two years, bolstering arguments that the Bank of England may have done enough to rein in inflationary pressures after delivering the most aggressive series of rate increases since the 1980s.
The pound fell as much as 0.4 per cent to $US1.2510. UK bonds gained, with the 10-year yield dropping 11 basis points to 3.86 per cent.
“It won’t be too long before the BoE’s narrative shifts from inflation to growth concerns – and that suggests there is scope for pound weakness in the coming weeks,” said Peter Kinsella, global head of FX strategy at Union Bancaire Privee. The pound-dollar pair could fall toward $US1.20 in the coming weeks, he said.
Bloomberg
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