Markets think the Bank of England will cut interest rates just twice in 2024 reflecting concerns around the persistence of inflation.
Following a hot US inflation reading yesterday and hawkish comments from a member of the Monetary Policy Committee (MPC) this morning, traders have pared bets on Bank of England interest rate cuts.
Markets are now fully pricing in only two rate cuts, down from three at the beginning of the week and as many as six at the beginning of the year.
The repricing came following a hotter than expected inflation reading in the US yesterday. The headline rate rose to 3.5 per cent in March, ahead of expectations and up from 3.2 per cent the month before.
This was the third consecutive month in which inflation came in ahead of market expectations. Traders now think there is just a 20 per cent chance that the Fed will cut rates in June, down from a 50 per cent chance at the beginning of the week.
“This upside inflation surprise has led to a big reassessment about the chance of rate cuts this year, with investors questioning if the Fed can still cut if inflation remains this persistent,” Deutsche Bank’s Jim Reid said.
Markets were also digesting comments from Megan Greene, an external member of the MPC. Greene argued that investors were underestimating the risks of inflationary persistence in the UK.
“Inflation persistence is a greater threat (in the UK) than the US. But market pricing for interest rates does not reflect this,” she warned in a Financial Times column.
“Rate cuts in the UK should still be a way off,” she added.
Prior to the inflation release, markets had been increasingly confident that the Bank of England would start cutting rates in June given the progress on inflation.
Inflation is expected to fall below the two per cent target when April’s figures are released while the economy still remains relatively weak.
After the MPC’s last meeting, Andrew Bailey, the Bank’s governor, said rate cuts were “in play”.
The European Central Bank (ECB) meanwhile announced its latest interest rate decision today. While it kept rates on hold for a fifth consecutive meeting, it suggested that interest rate cuts were under consideration.
In a statement, the ECB said it would be “appropriate to reduce the current level of monetary policy restriction” if it receives further evidence that inflation is converging to target in a “sustained manner”.
“All eyes were on the ECB’s statement today to ascertain whether the Fed’s reservations would have any impact on future interest rate decisions in the Eurozone,” Michael Field, European market strategist at Morningstar said.
“Thankfully for European investors it seems the ECB is happy to go it alone. The language in the statement is sufficiently vague, but does not indicate that the ECB is backing away from cutting rates as soon as June,” he continued.