Traders Bet BOE More Likely to Start Rate Cuts Than Fed or ECB

(Bloomberg) — Traders are betting the Bank of England could beat its European and US peers to interest-rate cuts, a turnaround from expectations it would be a laggard in 2024.

Money markets have raised wagers on easing at its next monetary-policy decision, putting the probability of a cut at 20%, compared to less than 10% for the Federal Reserve and European Central Bank. That follows remarks last week by Governor Andrew Bailey that rate cuts were in play at future meetings as inflationary risks have eased.

It’s a big shift in market positioning. The UK had been expected to lag peers as inflation remained stubbornly high last year despite the fastest hiking cycle in decades. At the start of 2024, money markets favored two cuts from the Fed and ECB by their third meeting of the year, but only one from the BOE.

Now the debate is whether it will move in May. Citigroup Inc. strategist Jamie Searle is recommending a swaps wager that is targeting triple the amount of rate cuts getting priced in for that month. He pointed to Bailey also saying last week that rate-setters will need to “act ahead of time.”

Bailey’s comments “perhaps makes May seem like a reasonable time to cut,” Searle wrote in a note to clients.

Read more: BOE Bailey Says UK Is ‘On the Way’ to Winning Inflation Fight

Still, not everyone is convinced. JPMorgan Chase & Co. strategists including Francis Diamond like tactically betting against any such easing in May, given the paucity of economic data before the next BOE meeting. While “the market is keen to fade” the persistence of UK inflation, Bank of America Corp.’s Agne Stengeryte recommends betting the ECB will still beat the BOE to a move in June.

Market odds favor rate cuts from all three central banks by then. The BOE or ECB wouldn’t be the first major central bank to cut in Europe — the Swiss National Bank surprised markets by moving last week.

Bond traders are also preparing for the BOE to ease. While UK two-year yields — among the most sensitive to monetary policy — rose six basis points Monday to lead Treasury yields higher, they have slid in recent days to the lowest since early January. That has cut their premium over German peers to the weakest in almost a year, showing the growing odds of an earlier UK move.

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