Traders bet on interest rate cut this year: Bank expected to shore up economy amid fresh signs inflation is being brought under control
Money markets are betting interest rates will start to fall this year as inflation fears are overtaken by the need to shore up Britain’s ailing economy.
Traders are now pricing in the Bank of England’s benchmark rate hitting a peak of 4.5 per cent over the summer before drifting towards 4 per cent by the end of 2023.
It comes after the latest signs that inflation is being brought under control as official figures showed factories reduced their prices in December by the sharpest pace since April 2020.
Traders are now pricing in the Bank of England’s benchmark rate hitting a peak of 4.5% over the summer before drifting towards 4% by the end of 2023
At the same time, a leaked private memo from the Office for Budget Responsibility showed the fiscal watchdog was set to cut its growth forecasts.
It comes a day after a monthly business survey showed the UK suffered a worse-than-expected start to the year as strikes and cost of living pressures added to fears of a looming recession.
Stuart Cole, macro economist at Equiti Capital, said: ‘The data was not good. The bigger picture is today’s producer price inflation numbers, which have shown inflationary pressures to be receding and which have cast doubts on how far the Bank will ultimately raise interest rates too.’
Kenneth Broux, a strategist at Societe Generale, told Bloom-berg: ‘Inflation is clearly on a downward trajectory.
‘If you have a recession on top, there is no reason the Bank can’t start cutting interest rates by year-end.’
Market bets show the Bank is expected to hike its main interest rate by half a percentage point to 4 per cent next week.
Further 0.25 per cent hikes are then expected before it peaks at 4.5 per cent before turning lower.
It is currently 3.5 per cent and in December 2021 was 0.1 per cent.
But it is a far cry from fears in the wake of Kwasi Kwarteng’s disastrous mini-Budget last September that rates could hit 6 per cent, and signals that the end may be in sight for the Bank’s aggressive fight against inflation.
The rate rises have added to recession fears as homeowners and business borrowers face much higher loan repayments.
Inflation is still in double digits but has been drifting downwards after hitting a four-decade high of 11.1 per cent late last year.
Yesterday, figures published by the Office for National Statistics showed ‘factory gate’ prices fell 0.8 per cent between November and December, the biggest fall in the monthly rate since April 2020.
Inflation soared across the world last year but has started to drift downwards in the US and eurozone and the UK.
That has prompted central banks to put the brakes on sharp hikes of up to 0.75 percentage points. Now, markets are focused on when hikes will stop, and then start to fall.
Some fear that the battle against inflation, which has spiralled after Russia’s invasion of Ukraine pushed up food and energy prices, may not be over.
If the reopening of the Chinese economy drives demand for commodities higher, there could be upward pressure.
The pound drifted lower initially versus the dollar yesterday before recovering to finish around half a cent higher, just shy of $1.24.