BoE does little to dent investors’ big 2024 rate cut bets

By Harry Robertson

LONDON (Reuters) -The Bank of England’s tough talk on inflation on Thursday only slightly reined in investor expectations that interest rates will fall sharply in 2024, after the Federal Reserve said it was moving towards cutting borrowing costs.

The Bank held firm on Thursday, keeping interest rates at a 15-year high of 5.25% and warning they would stay elevated “for an extended period,” sticking to its previous language. Three members of its nine-strong Monetary Policy Committee voted to raise borrowing costs.

Investors slightly moderated their bets on rate reductions and by 1445 GMT they were expecting around 110 basis points (bps) of cuts in 2024, down from 115 bps just before the meeting.

The U.S. Federal Reserve caused traders to price in big falls in borrowing costs around the world after it signalled it was now thinking about when to cut interest rates on Wednesday.

As much as 125 bps of UK cuts were priced in at one point in the morning session, according to money market data, up dramatically from around 75 bps a week ago.

BoE Governor Andrew Bailey on Thursday said that “there is still some way to go” to bring down inflation down to 2%, from October’s 4.6% level.

Traders softened their expectations for when the first UK cut would come.

Investors last saw an 85% chance of a 25 bp rate cut in May, an outcome which was fully priced in before the decision. A March cut was seen as a 30% possibility, from as much as 60% in the morning in London.

Other factors were at play on Thursday, however, with the European Central Bank also saying it would hold rates steady for an extended period and U.S. economic data coming in stronger than expected.

Sharp falls in U.S. and European inflation have fuelled rate cut bets. Data this week showed the UK economy shrank in October and wage growth slowed.

“The Bank of England is clearly reluctant to endorse market pricing for rate cuts in 2024,” said James Smith, developed market economist at ING.

Yet he said “markets are right to be thinking about a series of rate cuts next year”, pointing to the slowdown in growth and wages.

British bond yields, which plunged in the morning session after the Fed, pared some of their fall after the BoE meeting.

The benchmark 10-year Gilt yield was last down 7 bps at 3.761%, compared to 3.722% before the BoE decision. Yields move inversely to prices.

(Reporting by Harry Robertson, additonal reporting by William Schomberg; editing by Sarah Young, William Maclean)