Investors lowered their bets on the pace of interest rate cuts by the Bank of England after stronger-than-expected headline inflation on Wednesday, a day after wage growth figures also suggested persistent price pressures in the economy.
Interest rate futures were pricing about 52 basis points of reductions to the BoE’s Bank Rate by December – equivalent to just over two quarter-point rate cuts – at 1320 GMT.
That compared with more than 60 bps of cuts priced into the market earlier this week.
British government bond yields rose – in line with their German peers – with 10-year gilt yields up 6 basis points on the day at a three-week high of 4.62% and on course for the biggest one-day rise since January 8.
UBS said it now expected the BoE to stick with a quarterly pace of rate cuts in 2025, having previously forecast the central bank would cut rates faster in the second half of the year.
“With our new forecast foreseeing inflation hovering around 3% this year, we think that the Bank will maintain its gradual approach to easing,” UBS economist Anna Titareva said, predicting interest rates would bottom out at 3% in 2026.
Data published earlier showed British inflation hit a 10-month high of 3.0% in January, above all forecasts in a Reuters poll of economists.
On Tuesday, official figures showed fast wage growth and other signs of strength in the jobs market.
Earlier this month, BoE said it expected consumer price inflation to peak at 3.7% later this year. But it lowered borrowing costs by a quarter point to 4.5%, saying a labour market slowdown was likely to snuff out longer-term price pressures.
Economists at Barclays said they were sticking with their forecast of four more BoE rate cuts between May and September with Bank Rate settling at 3.5%, down from 4.5% now.
“We continue to expect a resumption of cuts from May onwards when data out-turns should give the MPC (Monetary Policy Committee) sufficient confidence to shift to sequential easing, in our view,” the Barclays economists said in a note to clients. (Writing by William Schomberg; Editing by Alison Williams)
