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Investors are coming round to the view that the Bank of England is likely to cut interest rates this week, encouraged by signs that inflationary pressures are receding globally.
Traders in swaps markets are placing a probability of around 65 per cent that the central bank will lower rates from a 16-year high of 5.25 per cent on Thursday, having priced a 40 per cent likelihood following the UK’s latest inflation figures earlier this month.
Investors said the moves have come as the BoE is likely to focus on the long-term outlook for inflation and growth, with unemployment rates rising and goods prices easing, despite services inflation remaining uncomfortably high.
“Market expectations for a rate cut have been ticking up, I think it’s a disinflation narrative . . . there’s been underwhelming data from Europe and that has tipped the balance in favour of a BoE rate cut this week,” said Ranjiv Mann, a portfolio manager at Allianz Global Investors, who is expecting a quarter-point rate reduction from the UK central bank on Thursday.
Interest rate sensitive 2-year gilts gained on Wednesday pushing yields down 0.06 percentage points to 3.81 per cent, on course for their biggest monthly fall this year as expectations for rate cuts have risen.
Official figures on Tuesday showed the Eurozone economy grew 0.3 per cent in the second quarter, slightly weaker than the 0.4 per cent the European Central Bank had forecast while business surveys have also indicated that the Eurozone has been affected by fragile consumer confidence.
While the latest UK economic data has been relatively robust, investors say recent signs of slowing growth and inflation in the eurozone and the US have spurred bets that the British economy is likely to follow a similar trajectory.
“We think the UK needs easier rates because the growth outlook is soft,” said Guy Stear, head of developed markets strategy at Amundi Investment Institute, forecasting a year-on-year growth rate to stay below 1.5 per cent in every quarter of 2025, even with lower rates.
Earlier this month investors shied away from an August rate cut after the BoE chief economist Huw Pill said that drivers of UK inflation were showing “uncomfortable strength”. Services inflation — closely followed by the BoE as a sign of underlying price pressure — was also disappointingly high in June at 5.7 per cent.
But investors’ focus has shifted back to a broader range of economic indicators, including earnings growth which slowed in the three months to May, while job vacancies have fallen and unemployment at 4.4 per cent is a little higher than the BoE expected.
“We are steering towards a cut — there is enough just to tip it over in terms of the labour market dynamics,” said Sree Kochugovindan, economist at Abrdn.
John Pattullo, co-head of global bonds at Janus Henderson said that UK rate-setters now “seem to have a greater focus on a broad variety of inflation factors, rather than just services inflation,” and that “current rates are restrictive and will need to fall as inflation has already fallen significantly”.
Calls for rate cuts come as the BoE has kept its key deposit rate at 5.25 per cent since August last year. Headline inflation has remained at the central bank’s 2 per cent target for two successive months, but is expected to pick up later this month because of higher energy prices.
Some investors say this could pave the way for an opportunistic rate cut on Thursday before holding at the following meetings.
“I think the BoE will probably cut but this will end up one and done for the cycle” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management. “Inflation will be higher by the next meeting so there is only a brief window to cut”.