(Bloomberg) — Traders are betting the Bank of England will reverse course and cut its key interest rate later this year to shore up a flagging economy.
For the first time since August, money-market wagers show 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 rates will continue to rise before peaking around 4.5% in the summer.
The repricing comes after a string of economic data pointed to growth stalling and inflation easing, and shows 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%, 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 Wednesday revealed UK factory price inflation rose at the slowest pace in almost a year, following separate releases Tuesday that signaled weak services industry sentiment and factories curtailing production at record rates.
Read more: UK Recession Risks Grow With Record Deficit and Output Slump
The end of hiking cycles are coming into sight for many developed economy central banks, prompting speculation from market participants over 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.
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 3.21%. The BOE is scheduled to meet next week, alongside the Federal Reserve and European Central Bank.
–With assistance from Libby Cherry.
(Updates pricing, adds context in third paragraph.)
