Sterling retreats after BoE paved way for rate cut

On Thursday, the British blue-chip stock index set a record as the Bank of England moved closer to reducing interest rates, with a second official endorsing the move. Meanwhile, the pound sterling and UK bond yields declined. Sterling hit a two-week low of $1.2446, down as much as 0.4% vs the dollar. It closed little higher at $1.2515, but it was last at $1.2471. The pound went down 0.1% to 86.04 pence per euro.

The Bank of England said on Thursday its Monetary Policy Committee voted 7-2 to keep rates at a 16-year high of 5.25% after Deputy Governor Dave Ramsden joined Swati Dhingra in voting for a cut to 5%. Analysts believe the BoE is setting the stage and pave the way for a summer rate cut.

Money market traders still see around a 45% chance of a rate cut from the Bank of England at next month’s policy meeting, while around 55 basis points of easing is priced by year end, implying two quarter-point cuts.

BoE Governor Andrew Bailey said future rate cuts may exceed those priced by the market. “It’s likely that we will need to cut bank rates over the coming quarters and make monetary policy somewhat less restrictive over the forecast period – possibly more so than currently priced into market rates,” Bailey said in the post-decision press conference.

Markets fully price the first quarter-point rate cut by the August meeting, earlier than the U.S. Federal Reserve, where a 25 basis point rate cut isn’t fully priced until November. Money markets price the first easing from the European Central Bank in June.