(Bloomberg) -- One trader has placed a contrarian bet that the Bank of England will cut interest rates aggressively this year, even as concern about sticky inflation and the budget deficit send UK bond yields soaring.
The wager, which uses options contracts tied to interest-rate futures, could pay out four times the initial premium of around £3 million ($3.7 million) if policymakers reduce the benchmark rate to 3.5% by year-end, data compiled by Bloomberg show.
That’s the equivalent of five quarter-point moves and contrasts with money market pricing currently pointing to just two 25-basis-point cuts. Traders have curbed their expectations for rate reductions on concern Chancellor of the Exchequer Rachel Reeves’ policies will fan inflation. Before her October budget, they were pricing five possible cuts this year.
UK markets have been roiled this week with 30-year gilt yields hitting the highest since 1998, fueled by tariff threats from Donald Trump and signs of climbing inflation expectations. It’s a worry for the Labour government who are counting on investors to buy a near-record sum of bonds this fiscal year.
The cautious start to 2025 year stands in stark contrast to a year earlier, when traders were predicting six cuts in 2024 — before policymakers eventually delivered just two.
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