Traders significantly pared bets on interest-rate cuts from the Bank of England after data showed that in December consumer prices rose by 4.0% per year after increasing by 3.9% per year in November. It is the first increase in inflation rate in ten months. Economists had expected inflation to slow to 3.8% per annum. Meanwhile, core CPI - which excludes energy, food, alcohol and tobacco - rose by 5.1% per annum (the lowest rate since January 2022) after a similar increase in November. Consensus estimates suggested an increase by 4.9% per annum.
Now the money markets expect that this year the Central Bank will cut rates four times by 0.25%, while the probability of a fifth rate cut is estimated at about 65%. Before the publication of the data, five cuts were fully priced. Traders have also revised their expectations for the first rate cut - the probability of a rate cut in May is now estimated at just over 50%, compared with about 85% yesterday.
Meanwhile, experts said that the latest inflation data is likely to strengthen expectations that the Bank of England will lag behind the ECB and the Fed in cutting rates this year. Current pricing assumes that by December, the Bank of England will cut rates by about 1.16%, and the ECB and the Fed will cut rates by 1.41% and 1.5%, respectively.