UK financial markets anticipate the Bank of England’s initial interest rate reduction to occur in September instead of August, with a forecast of only two decreases this year.
This shift in outlook followed the recent US inflation data, which exceeded expectations and caused upheaval in the government bond market.
Neil Wilson, Chief Market Analyst at Finalto, commented, “This is the most significant movement in the Treasury market since the disruption caused by Kwasi Kwarteng’s announcement in the brief Liz Truss government in late 2022.”
He noted that two-year government bond yields surged roughly 20 basis points, a magnitude not seen since last year’s regional banking crisis. Post-data release, the 10-year yield also climbed over 20bps, leading traders to eliminate the possibility of a rate cut in June.
Wilson observed, “This marks a substantial shift from earlier this year. The impact is akin to a stone causing ripples in a pond.”
These developments follow the recent US inflation figures, which were marginally higher than anticipated, raising doubts about whether the US Federal Reserve and other central banks might delay interest rate reductions.
March saw US consumer prices accelerate to 3.5%, up from 3.2% in the previous month and surpassing the 3.4% prediction. The core US CPI index, excluding food and energy, remained at 3.8%, as in February, but was above the projected 3.7%.
Nevertheless, some economists believe the Bank of England might not mirror the Federal Reserve’s approach. Ruth Gregory of Capital Economics holds this view, suggesting that differing inflation rates between the UK and the US could allow the Bank of England to lower rates from 5.25% to 5.00% in June and to 3.00% next year.
However, she acknowledges that sustained high inflation, as seen in the US, could influence the Bank’s decision.
Gregory’s team anticipates rate cuts by both the Fed and the BoE in June, but she concedes that if the Fed refrains from cutting rates, there might be less urgency for the Bank of England to do so.
