Traders eye August rate cut after Bank re-maintains base rate, pushing down sterling and bond yields
The pound fell and bond yields fell yesterday after the Bank of England revived hopes of a rate cut in the summer.
Interest rates remained at 5.25 percent, but the Bank said it will “consider all available information” in August about whether “the risks of inflation persistence are waning.”
And while members of the Monetary Policy Committee (MPC) voted 7-2 to maintain rates, the decision was “balanced” for some as they considered joining the two in support of a cut.
If the doubters abandon their doubts and vote for a cut in August, that could be enough to cut rates for the first time since early 2020.
“It’s fair to say that the MPC left a rate cut in August on the table,” said Deutsche Bank economist Sanjay Raja.
Base rate instincts: Traders increased their bets on a rate cut in August as they saw a near 50% chance the Bank would act then – just four weeks after the general election
Sterling fell about half a cent against the dollar to less than $1.27 and also fell against the euro to just above €1.18.
Traders also increased their bets on a rate cut in August as they saw an almost 50 percent chance that the Bank would take action then – just four weeks after the general election.
However, September is still considered more likely.
The yield on British 10-year bonds – the return investors demand for loans to the government – fell to just over 4 percent, the lowest level in two months. The interest rate on bonds falls as their price rises.
In the stock market, the FTSE 100 rose 0.8 percent, or 67.35 points, to 8,272.46, while the more domestically focused FTSE 250 rose 0.6 percent, or 117.67 points, to 20,498.72.
Dan Coatsworth, investment analyst at AJ Bell, said: ‘Investors are looking forward to a future where inflation is back under control and interest rates start to fall, and the magic moment appears to be within reach.’
The Bank resisted an interest rate cut yesterday, even though official figures a day earlier showed inflation falling to the 2 percent target for the first time in almost three years.
That’s because inflation is forecast to rise again later this year, towards almost 3 percent.
The country is also concerned about underlying inflation rates from the services sector – from restaurants to hairdressers – which remain at a high level of 5.7 percent.
And the 6 percent wage growth is also seen as possible upward pressure on prices.
Yet the latest bank minutes appeared to downplay these fears.
Some rate setters noted that inflation in the services sector was being artificially boosted by annual payment increases for things like mobile phone contracts and water bills.
And wage growth rates have skyrocketed with the rise in the national living wage in April.
The MPC members who voted for a rate cut were Swati Dhingra and Deputy Governor Dave Ramsden.