Interest rate futures fully priced in a first 0.25% rate cut by the Bank of England for August and see two rate cuts before the end of the year. Overall, financial markets now expect the Central Bank to cut rates by 0.54% this year, compared with 0.42% forecast on Friday.
The revision of expectations was driven by statements by the Deputy Governor of the Bank of England, Dave Ramsden, who said on Friday that inflation in the UK could remain near the target level (2%) for the next three years. Currently, the Bank of England predicts that inflation will fall below 2% in the second quarter, and then rise again to 3% later this year.
According to official data, in March consumer prices rose by 3.2% per year after an increase by 3.4% in February. That is the lowest since 2021 and the first time the rate in Britain has been below that of the US since March 2022. Economists expect a further decline in inflation in April, with potential to fall below the Bank’s 2% target after a sharp drop in household gas and electricity bills to the lowest level for two years. Meanwhile, core CPI - which excludes energy, food, alcohol and tobacco - rose by 4.2% per annum (the lowest rate since December 2021) after an increase by 4.5% in February. Consensus estimates suggested an increase by 4.1% per annum. On a monthly basis, core consumer prices rose by 0.6%, compared with the 0.6% increase in February and the market estimate of a 0.3% increase.
As for the situation in the foreign exchange market, since the beginning of 2024, the pound has fallen by about 3% against the US dollar, mainly due to the fact that traders radically overestimated how much interest rates in the United States could fall by this year. The next important event for the pound will be tomorrow's publication of preliminary PMI data. The UK is currently top of the leaderboard of major economies in terms of purchasing managers' surveys.