Market Movements: Pound Dips, Gilts Gain as BoE Signals Potential Rate Cuts
The financial landscape saw a notable shift as the Bank of England (BoE) announced its decision to maintain the benchmark interest rate at 5.25%, a level not seen since 2008. This move was anticipated by the markets following recent data indicating a drop in inflation, yet concerns linger over its persistently high levels.
Sterling experienced a downturn, dropping to $1.2726, a 0.48% decrease from its earlier position. Despite this dip, the currency is trending towards a 1% monthly gain against the dollar. The pound’s performance against the euro also weakened, registering a 0.3% fall to 85.63.
UK government bonds, known as gilts, particularly the two-year yields sensitive to rate expectations, witnessed a significant rally. Yields plummeted by up to 12.8 basis points, reaching a low of 4.103%, as investors reacted to the central bank’s cues.
The BoE’s committee exhibited a shift in sentiment, with an 8-1 vote to keep rates steady. Notably, two members who previously advocated for rate hikes adopted a more neutral stance. Market strategist Fiona Cincotta from City Index observed, “That’s what really caught my eye – the two hikes last meeting have turned more neutral and looking to keep rates on hold.” She added, “Overall that must make for a less hawkish position from the central bank. And you can see the ship is turning towards that rate cut and that is what the pound has grasped on to.”
Despite the UK’s inflation rate’s decline from January’s 4.0% to 3.4% in February, it remains the highest among the Group of Seven nations. The persistent inflation has been a supporting factor for sterling this year, buoyed by expectations that other major central banks may initiate rate cuts ahead of the BoE.
Following the BoE’s announcement, market odds for a June rate cut surged to 75%, up from approximately 65% earlier in the day. This adjustment came as the Swiss National Bank surprisingly reduced its rate by a quarter-point, becoming the first major central bank to ease the tight monetary policy implemented to combat inflation. Meanwhile, Norges Bank held its rate steady.
In other economic news, Japan and the United States central banks have also made significant policy decisions. The Bank of Japan ended its negative interest rate policy and hiked rates for the first time in 17 years, while the Federal Reserve signaled intentions to cut rates thrice this year but remains vigilant on inflation trends.
A separate survey revealed that British businesses continued their post-recession recovery this month. However, enduring inflationary pressures could present challenges for the BoE’s future policy direction.
