Traders are forecasting that the Bank of England (BoE) will implement just two interest rate cuts next year, following an expected rise in inflation to 2.6%.
After the latest inflation data, money markets indicate that investors have slightly adjusted their expectations for rate reductions. This adjustment comes after bond traders reacted strongly to Tuesday’s employment figures, which revealed wages increasing faster than anticipated.
On Tuesday, the yield spread between UK and German bonds reached its widest since 1990, heightening concerns that the UK may be entering a stagflation period characterized by high inflation coupled with low economic growth.
Derivatives trading suggests that the market now expects only two interest rate cuts in 2025, down from the three cuts that were fully priced in by the end of last week.
The Bank of England is expected to maintain current interest rates during its upcoming meeting on Thursday, following a second rate reduction last month.
Jeremy Batstone-Carr, a strategist at Raymond James, commented on the situation: “Given the weak economy, the Bank will likely be inclined to provide support where possible. However, policymakers will only proceed with rate cuts if inflationary pressures sufficiently ease, ensuring that easing monetary policy does not reignite inflation.”
