Traders Increase Bets on BoE Rate Cut as Market Sees Bumper FOMC Decision

Gilt markets are pricing in a 35% chance of a rate cut by the BoE this week, as the probability of a 50 bp cut from the Fed is seen as most likely.

Fed interest rate decision expectations have been driving the global stock market higher. I feel a cut of 25 bp, seems unlikely, and would be disastrous for the market.

But even a cut of 50 bp, as the market expects, will probably not have the desired effect so many are urging for. The [FTSE]] has had its own set of contentions to deal with also. The General election put an extreme left-wing party into power.

Despite the pre-election campaign promises to not raise taxes, the government is now committed to raising taxes across the board. Not only will that reduce the spending capacity of consumers, but SMEs will be affected also.

We are likely to see the GDP contract over the next quarters, and that will hinder the stock market. Some relief could come from the BoE, the market is beginning to bet on a rate cut already in the next meeting on Wednesday.

Traders and investors are still in consensus of no change, but gilt markets are pricing in a 35% chance of a cut. The shift in sentiment means that the chances of a cut at the following meeting in November are stronger.

Inflation Data BoE Expectations

UK inflation data came in as analysts’ forecast, YoY inflation is steady at 2.2%, but Core inflation ticked up to 3.6% YoY from last month’s 3.3%. These numbers seem hardly the type of data the central bank is looking for to continue its monetary loosening policy.

After the rate cut in August, we can expect the central bank to look for a sharp decline in inflation and jobs data to justify a cut as soon as this week. The most likely scenario is that if inflation stays at or around 2%, with little pressure from the jobs market we get another cut in November.

Part of the statement after the August 1 MPC meeting stated:

“Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further,”

I believe that the path is clear, as inflation data is still slightly above the 2% target with other metrics showing stubbornness, it seems the likeliest outcome is for rates to remain on hold.