After a report showed that U.K. inflation fell sharply to its lowest level in more than three years, traders increased their bets that the Bank of England would cut interest rates. This caused the British pound to drop below $1.30 and government bond yields to drop.
On Wednesday, the Office for National Statistics said that the U.K. consumer price index rose 1.7% over the past year, which is less than the 2.2% rise seen in August.
The ONS said that cheaper petrol and flights were the main reasons why inflation was slowing down.
Inflation fell below the Bank of England’s goal of 2% for the first time since April 2021. It was also slower than the 1.9% economists had predicted.
The BoE had recently said that inflation would be around 2.1%, so this was a big drop. As a result, traders quickly increased their bets that the Monetary Policy Committee of the central bank would be more likely to lower interest rates in the coming months.
The main interest rate set by the Bank of England is currently 5%. According to Reuters, interest rate futures now show a 90% chance that this will be lowered by two 25 basis point cuts by the end of the year. This is up from 80% on Tuesday. The next MPC meeting for the BoE is on November 7.
Rob Clarry, an investment strategist at Evelyn Partners, a wealth management company, said, “Not only did the annual inflation rate for September come in much lower than expected, but there was also a notable drop in key services inflation.”
“Bank of England Governor Andrew Bailey said earlier this month that the MPC could be a ‘bit more aggressive’ with rate cuts. This week’s data on the weakening job market adds to the evidence to support this view,” Clarry said.
It hurt the pound (GBPUSD 0.02%) that rate cuts might happen faster. It dropped 0.6% to $1.2990, its first time below $1.30 since the middle of August.
The yield on the 2-year Gilt, which is sensitive to changes in monetary policy, fell 8.8 basis points to 4.048%, which was good for U.K. government bonds.
The FTSE 100 index UKX -0.02% went up 0.8%. Homebuilders led the way as they hoped that lower mortgage rates would make more people want to buy homes.
