Traders eye August cut after Bank holds base rate again sending pound and bond yields down

The pound fell and bond yields dropped yesterday after the Bank of England revived hopes of a summer interest rate cut.

Rates were left at 5.25 per cent but the Bank signalled that in August it will ‘consider all the information available’ on whether ‘risks from inflation persistence are receding’.

And while members of the Monetary Policy Committee (MPC) voted 7-2 to hold rates, the decision was ‘finely balanced’ for some as they considered joining the two who backed a cut.

If the waverers abandon their doubts and vote for a cut in August that could be enough to take interest rates lower for the first time since the start of 2020.

‘To be sure, the MPC has left an August rate cut on the table,’ said Deutsche Bank economist Sanjay Raja.

Base rate instincts: Traders increased their bets on an interest rate cut in August, seeing a near 50% chance that the Bank will act then – just four weeks after the general election 

Sterling fell by about half a cent against the dollar to less than $1.27 and also slipped against the euro to just above €1.18.

Traders also increased their bets on an interest rate cut in August, seeing a near 50 per cent chance that the Bank will act then – just four weeks after the general election.

However, September is still seen as more likely.

Yields on UK ten-year bonds – the rate of return demanded by investors for lending to the government – fell to just over 4 per cent, a two month low. Bond yields fall as their prices rise. 

On the stock market, the FTSE 100 rose 0.8 per cent, or 67.35 points, to 8272.46 while the more domestically-focused FTSE 250 added 0.6 per cent, or 117.67 points, to 20,498.72.

Dan Coatsworth, investment analyst at AJ Bell, said: ‘Investors are looking for a future when inflation is back under control and rates start to ease, and the magic moment looks to be in touching distance.’

The Bank resisted cutting rates yesterday even though official figures a day earlier showed inflation falling to its 2 per cent target for the first time in nearly three years.

That is because it projects that inflation will rise again later this year, heading close to 3 per cent. 

It has also been worried about underlying inflationary data from the services sector – covering businesses from restaurants to hairdressers – which is at a still-high 5.7 per cent. 

And wage growth, at 6 per cent, is also seen as potentially putting upward pressure on prices.

Yet the latest Bank minutes seemed to play down such fears.

Some rate-setters noted that services inflation had been artificially boosted by annual payment hikes for the likes of mobile phone contracts and water bills.

And wage growth figures have been bumped up by April’s increase in the national living wage. 

The MPC members who voted for a rate cut were Swati Dhingra and deputy governor Dave Ramsden.