(Bloomberg) -- Traders upped bets for further interest-rate cuts from the Bank of England this year after policymakers lowered borrowing costs by a quarter point as expected — with two voting for a bigger reduction.
Money markets added to BOE easing wagers, fully pricing two more quarter-point cuts and an 80% chance of a third, up from around 40% before the meeting. The pound fell more than 1% to $1.2361, while UK bonds initially rallied before paring the move.
While policy makers struck a hawkish tone by signaling that only two more reductions are needed to bring inflation to target, the market focused on the fact that the vote for easing was unanimous across the nine-member Monetary Policy Committee. It was also the first call for a cut by Catherine Mann, widely known as a policy hawk who surprised markets by joining another official in voting for a half-point reduction.
“Clearly the message is dovish,” said Emmanouil Karimalis, macro strategist at UBS, who expects the central bank to deliver one and a quarter percentage points of additional easing this year. “We expect inflation in the UK to moderate further, and given the weak growth outlook, this should incentivise the committee to cut further — especially in the second half.”
The 10-year gilt yield fell as much as six basis points to 4.38%, before pulling back to 4.45%. UBS’s Karimalis suggested that may be temporary, and the risk of more aggressive easing could eventually drive the yield as low as 4.1% by the end of the year.
The BOE’s decision on Thursday cemented a sharp reversal in market expectations in the past month.
UK yields were at a multi-decade highs at the start of the year, on concerns stubborn inflation would crank up borrowing costs and hamper the Labour government’s bid to revive the economy.
Since then, signs of easing price pressures and sluggish consumer demand pointed to a faltering economy, triggering a drop in the 10-year yield to its lowest level in nearly two months.
Pound Pain
The pound took a hit after the latest BOE cut, widely underperforming peers against the dollar on Thursday as ongoing rate cuts dent its high-yielding status. Traders also rushed to sell sterling against the euro, with activity in options suggesting room for further downside on the UK currency.
The pound is the only Group-of-10 currency to fall against the dollar this year, battered last month by turmoil in UK markets amid concerns about the outlook for public accounts and weak economic growth.
Pricing for rate cuts has surged in the past month, and the latest repricing shows the next cut is likely to come in May. Focus now turns to whether a sluggish economy and easing inflation could raise the argument for an even earlier cut.
“The market will now be focused on whether March could become a ‘live’ meeting for another 25 basis point cut,” said Craig Inches, head of rates and cash at Royal London Asset Management.
--With assistance from Alice Gledhill, Greg Ritchie and Vassilis Karamanis.
(Adds strategist comment, context thoughout.)