(Bloomberg) -- Traders added to bets on interest-rate cuts from the Bank of England this year, fully pricing two more quarter-point reductions, after data showed inflation accelerated less than forecast.
Money markets implied about 50 basis points of easing toward the end of the year, compared to 44 basis points on Tuesday. The chance of a cut in September rose to around 40% from 30% on Tuesday.
Investors are looking to UK economic data for guidance on the path for monetary policy after the BOE delivered a quarter-point cut at the start of the month. A lower-than-expected headline inflation rate in July helps the case for continued easing, but it follows a robust jobs report on Tuesday. Trader attention now turns to UK GDP and retail sales data out later this week for further evidence.
“Though overall price pressures remain higher than the Bank’s comfort level, the general direction of travel is still trending downwards, an encouraging sign for the Bank’s rate-setters,” said Jeremy Batstone-Carr, European strategist at Raymond James Investment Services. “Consecutive rate cuts unlikely, but this cannot be completely ruled out should these trends persist.”
Britain’s headline inflation rate picked up to 2.2% in July, but it remained below the level economists expected. Services inflation, which policymakers watch closely, cooled to 5.2%, the lowest reading in more than two years and below the 5.6% the BOE was forecasting.
The pound fell as much as 0.3% to $1.2820 after the data was released, paring its first week of gains in five. The currency is still the best performing out of its peers this year, largely due to bets the BOE will keep rates high relative to other major central banks.
UK two-year bond yields — among the most sensitive to changes in monetary policy — fell six basis points to 3.54%, the lowest since Aug. 5.
Still, JPMorgan Asset Management doubts that consecutive rate cuts will come through.
“There remains a risk that cutting too quickly will fan the inflation flames,” said Aaron Hussein, global market strategist at JP Morgan Asset Management. “We therefore think it’s unlikely that the Bank will follow up its August cut with a cut in September.”
(Updates with context, commentary and market moves throughout.)
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