UK Investors Ramp Up Bets on Potential BoE Rate Cuts Following Inflation Data

Following unexpectedly weak British inflation figures, UK investors have increased their wagers on the likelihood of the Bank of England (BoE) slashing interest rates, potentially marking the first decrease in borrowing costs since June.

Unexpected Inflation Rates Influence Investor Predictions

In response to the inflation data reported on Wednesday, interest rate futures indicated that there is now approximately a 60% probability of a rate reduction by the BoE in June, with the Bank Rate expected to drop from 5.25% to 5.0%. This is a significant change from the prior day when investors projected a 40% chance, before the impact of higher-than-anticipated U.S. inflation data shifted market sentiments globally.

British Inflation Holds Steady

The inflation rate in Britain remaining constant at 4.0% in January took economists by surprise, as projections had suggested an increase. This caused a subsequent drop in yields for two-year gilts, decreasing by up to 13 basis points soon after the inflation report was published, backing down from their highest peak since late November. At one point, the yields were down by 10 basis points, sitting at 4.58%.

Market Reactions to Global and Domestic Data

Discussing market reactions, economist Philip Shaw from Investec noted a sharp adjustment following the unexpectedly strong U.S. Consumer Price Index (CPI), which had initially tempered expectations for the number of policy rate cuts both in the UK and the US. However, according to Shaw, the publication of the domestic inflation report has partially reversed these adjustments in UK rate markets.

In light of the recent British inflation data, investors are now gearing up for a potential total of 67 basis points in rate cuts by the BoE by the end of 2024. This is an upshift from approximately 58 basis points anticipated before the data release.

Inflation, Interest, Investors