Traders Dial Back Bets on BOE Easing as Inflation Stays Stubborn

After UK inflation came in higher than predicted, traders decreased their bets on the Bank of England's extent of monetary easing in 2024. They currently expect only one 25 basis point reduction by November, with a 30% probability of a second cut, which later crept closer to a 50% chance.

Traders Scale Back Bets on Bank of England Monetary Easing Amidst Persistent Inflation

Traders have significantly reduced their expectations for monetary easing by the Bank of England (BOE) in 2024, following the release of inflation data that indicated a slower-than-anticipated decline in price pressures.

The latest market pricing suggests that traders now anticipate only one 25 basis point interest rate cut from the BOE this year, a departure from earlier expectations of multiple reductions. The pound sterling experienced a slight rebound from its five-month low on the prospect of a more gradual easing cycle.

The shift in sentiment was prompted by the release of the Consumer Price Index (CPI) data, which showed that UK inflation declined to 2.5% in March, falling short of market forecasts of 2.3%. This persistent inflation has raised concerns among investors that the BOE may be forced to adopt a more cautious approach to monetary policy.

Traders initially priced in a fully priced quarter-point rate cut by November, but that probability has since moderated. The market now assigns a mere 30% chance of a second cut this year, although this figure has slightly increased since the initial reaction to the inflation data.

The BOE's Monetary Policy Committee (MPC) is scheduled to meet on May 11th to announce its latest policy decision. The MPC is widely expected to keep interest rates unchanged at 0.5%, but traders will be closely monitoring the accompanying statement for any signals regarding the future path of monetary policy.

Analysts believe that the BOE will likely adopt a wait-and-see approach, closely monitoring inflation data and economic indicators before making any significant policy shifts. However, the elevated levels of inflation could prompt the MPC to initiate a modest tightening cycle later in the year if price pressures fail to moderate as expected.

The recent market developments underscore the challenges facing central banks in balancing the need to support economic growth with their mandates to maintain price stability. As inflation remains elevated, traders and investors will continue to scrutinize BOE signals and data releases for clues about the future direction of monetary policy.