Traders Ramp Up Bets on BOE Rate Cuts After UK Inflation Slows

Money markets rushed to price more interest-rate cuts from the Bank of England this year after data showed UK inflation fell unexpectedly in December, easing fears over persistent price pressures.

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Bloomberg News

Greg Ritchie and Alice Gledhill

Published Jan 15, 2025  •  2 minute read

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(Bloomberg) — Money markets rushed to price more interest-rate cuts from the Bank of England this year after data showed UK inflation fell unexpectedly in December, easing fears over persistent price pressures.

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For the full year, traders are now pricing 50 basis points of reductions — two quarter-point moves — compared to fewer than 40 basis points on Tuesday. The pound initially slipped by as much as 0.4% to $1.2163 before erasing the drop amid broad dollar weakness.

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UK consumer prices rose 2.5% from a year earlier, compared to economists’ estimate of 2.6%. Services inflation, watched closely by Bank of England officials, fell to 4.4% from 5% the previous month.

“Today’s inflation print could revive market BOE rate-cut expectations,” said Valentin Marinov, head of Credit Agricole’s Group-of-10 FX strategy in London. “While this is not all that great for the GBP’s relative rate appeal it could nevertheless make investors less gloomy about the economic outlook.” 

The inflation reading should also offer some respite to the UK government, which has come under pressure in recent days as concerns over fiscal challenges led to a sharp drop in UK assets. The yield on 10-year UK bonds rose for seven consecutive sessions to 4.89%. 

Hedge funds were the main sellers of the pound on Wednesday, meeting modest corporate demand, according to two Europe-based traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly.

For investors, the key question is whether officials continue cutting rates at a quarterly pace — implying a reduction at their meeting next month. Traders increased bets on such a move next month to 80% from 60%, according to swaps pricing. 

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UK Inflation Unexpectedly Slows in Boost for Rate Cut Hopes

Still, inflation may continue to complicate matters for the BOE through this year given higher energy and fuel costs and remains above the official 2% target. There are also question marks over the impact of Labour’s ambitious budget, announced last October and designed to stoke long-term growth. 

“We are not out of the woods yet,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management. “Inflation was already anticipated to accelerate in 2025 due to unfavorable base effects, but the policies announced in the October Budget have added fuel to the fire.”

—With assistance from Vassilis Karamanis.

(Updates with rate cut bets throughout.)

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