(Bloomberg) -- Investors are no longer fully pricing two quarter-point interest-rate cuts from the Bank of England next year amid signs of sticky price pressures that support the case for only cautious monetary easing.
Most Read from Bloomberg
Money markets implied just 49 basis points of rate reductions through end-2025, compared to over 70 basis points as recently as Monday. Data released earlier showed services inflation — closely watched by BOE rate-setters — remains stubbornly high at 5%.
The repricing toward fewer BOE cuts started on Tuesday as UK employment data suggested wages increased more than forecast, fanning concerns of lingering inflationary pressures. That prompted investors to reduce bets on further easing ahead of the central bank meeting on Thursday, when the Monetary Policy Committee is expected to hold rates steady at 4.75%.
“Today’s data will only reinforce the MPC’s message of patience and gradualism,” said Sanjay Raja, Deutsche Bank AG UK economist. “Put bluntly, the MPC is some way away from declaring victory on inflation.”
The reversal in market pricing on Wednesday coincided with a surge in trading in SONIA contracts as traders positioned for the BOE decision, as well as other risk events such as the Federal Reserve meeting later on the day. Volumes in three-month futures hit the highest over a half-hour period since Dec. 4.
While the BOE has cut rates just twice this year, trailing peers including the European Central Bank and Federal Reserve, the evidence this week emboldened the market to price in even greater caution from UK policymakers.
The BOE’s stance has supported the pound, which has outperformed all other Group-of-10 currencies against the dollar this year. Yet its cautious tone has weighed on gilts and exacerbated their underperformance, widening the gulf between yields on government bonds in the UK and Germany to levels last seen in 1990.
The two-year gilt yield, among the most sensitive to monetary policy, rose three basis points to 4.48% while the 10-year yield rose four basis points to 4.56%. The pound erased an earlier modest drop, trading just above $1.27.
What Bloomberg Strategists Say...
“The big-picture takeaway is that core inflation around 3.5% and services reading at 5% can barely inspire much confidence in the Bank of England to keep cutting interest rates...With the two-year breakeven rate holding above 3.20%, gilts traders will continue to be wary of pricing too many rate cuts.”
— Ven Ram, Cross-Assets Strategist, Dubai