Traders bet on interest rate being cut to 4% by end of this year

Money markets are betting that interest rates will begin to fall this year as inflation fears are overtaken by the need to support Britain’s ailing economy.

Traders are now pricing in the Bank of England benchmark rate, which peaks at 4.5 percent over the summer before drifting to 4 percent by the end of 2023.

It comes on the heels of the latest signs that inflation is being brought under control as official figures showed factories cut prices in December at the strongest pace since April 2020.

At the same time, a leaked private memo from the Office for Budget Responsibility revealed that the fiscal watchdog was poised to lower its growth forecasts.

It comes a day after a monthly business survey found the UK had a worse-than-expected start to the year as strikes and cost-of-living pressures heightened fears of an impending recession.

Stuart Cole, a macro economist at Equiti Capital, said: “The data was not good. The bigger picture is today’s producer price inflation numbers, which show that inflationary pressures are easing and cast doubt on the extent to which the Bank will eventually raise interest rates as well.”

Kenneth Broux, a strategist at Societe Generale, told Bloomberg, “Inflation is clearly on a downward trajectory.

“If you have a recession on top of that, there’s no reason why the Bank can’t start cutting rates by the end of the year.”

Market bets show that the Bank is expected to raise its key interest rate by half a percentage point to 4 percent next week.

Further increases of 0.25 percent are then expected before peaking at 4.5 percent before turning lower.

Now it is 3.5 percent and in December 2021 it was 0.1 percent.

But it’s a far cry from fears following Kwasi Kwarteng’s disastrous mini-budget last September that interest rates could hit 6 percent, and signals the end may be in sight for the Bank’s aggressive fight against inflation.

The rate hikes have increased recession fears as homeowners and business borrowers face much higher loan repayments.

Inflation is still in the double digits but is on the decline after reaching a four-decade high of 11.1 percent late last year.

Figures published yesterday by the Office for National Statistics showed ‘factory gate’ prices fell by 0.8 percent between November and December, the biggest monthly rate drop since April 2020.

Inflation soared around the world last year, but is starting to fall in the US, the Eurozone and the UK.

This has prompted central banks to curb sharp increases to 0.75 percentage point. Now the markets are focused on when the increases will stop and then start to fall.

Some fear that the battle against inflation, which has gained momentum after the Russian invasion of Ukraine, driving up food and energy prices, may not be over.

If the reopening of the Chinese economy boosts demand for commodities, upward pressure could emerge.

The pound initially fell lower against the dollar yesterday, but recovered to finish about half a cent higher, just under $1.24.