Traders are reducing their bets on the Bank of England cutting interest rates in August after services inflation proved more persistent than anticipated.
Money markets are now pricing in about a 35% chance that policymakers will lower borrowing costs for the first time in four years at their August meeting, having almost entirely ruled out a rate cut at tomorrow’s meeting.
Previously, traders had placed a 45% chance on an August rate cut before the latest inflation figures were released, which showed prices in the services sector—covering areas like education, hospitality, and culture—rose by 5.7%, exceeding the predicted 5.5%.
A full quarter-percentage-point reduction in interest rates is priced in by November, with a second reduction by the end of the year now given a 60% chance, down from 80% earlier.
Sanjay Raja, chief UK economist at Deutsche Bank, commented: “The gap between the Bank’s projection and actual data has widened slightly, raising concerns that services prices may be more persistent than expected. This will likely increase the threshold for an August rate cut.
What matters now is how much weight the MPC places on the spot—and arguably backward-looking—data. Survey data have been more encouraging recently. For now, markets have scaled back rate cut bets this year, suggesting a stickier Bank Rate path in the coming months.”
Guy Foster, chief strategist at RBC Brewin Dolphin, added: “While headline inflation is now in line with the target, this inflation report does not support the idea of cutting interest rates.”
