(Bloomberg) -- Investors are rapidly unwinding bets on further interest-rate cuts from the Bank of England, just hours before officials set monetary policy.
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The market is now assigning a roughly 50% chance of a quarter-point reduction in February, capping a week that’s seen traders reassess the scope for looser monetary policy in the UK. The final leg of the move came after Federal Reserve Chair Jerome Powell signaled greater caution over how quickly policymakers can continue reducing borrowing costs.
The prospects for easier monetary policy in the UK has dwindled this week after data showed wages increased more than forecast, fanning concerns of lingering inflationary pressures. Swap pricing implies traders expect around 50 basis points of rate cuts through end-2025, compared to over 70 basis points at the start of this week.
“We think the market is reaching the limit of how many cuts it can take out given the BOE is likely to reaffirm the gradual easing bias into 2025 with policy still restrictive,” said Citigroup strategists including Jamie Searle.
The doubts are notable given the BOE has been cutting rates every other meeting in what officials describe as a “gradual” pace of monetary easing — suggesting a reduction in February was likely. As recently as Monday, investors were betting on 20 basis points of easing, suggesting an 80% probability of a quarter-point cut.
Diverging Outlook
The divergence between traders’ outlook and past guidance from policymakers has created tension ahead of Thursday’s decision, with some investors warning that rate-setters may push back on market pricing.
The repricing has also put gilts under pressure. The yield on UK 10-year notes jumped as much as nine basis points on Thursday to 4.65%, the highest level since Oct. 2023, as it caught up with moves in US Treasuries overnight.
While consumer prices figures Wednesday came in line with economists’ expectations, that offered little relief given services inflation — closely watched by BOE rate-setters for signs of lingering pressures — remains stubbornly high at 5%.
The BOE is expected to hold rates steady at 4.75% at its meeting later Thursday, following two quarter-point cuts this year. It has eased monetary policy less than the Fed and the European Central Bank so far, a trend traders see continuing in 2025.
(Updates with context throughout.)
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