The pound fell and bond yields fell yesterday after the Bank of England revived hopes of an interest rate cut in the summer.
Rates were left at 5.25 percent, but the Bank said it would “consider all available information” in August on whether “the risks of persistent inflation are diminishing.”
And although members of the Monetary Policy Committee (MPC) voted 7 to 2 in favor of keeping rates, the decision was “finely balanced” for some as they considered joining the two who backed a cut.
If undecided voters abandon their doubts and vote for a cut in August, that could be enough to lower interest rates for the first time since early 2020.
“Without a doubt, the MPC has left a rate cut on the table in August,” said Deutsche Bank economist Sanjay Raja.
Instincts on base rates: Traders increased their bets on an interest rate cut in August, seeing a near 50% chance that the Bank will act then, just four weeks after the general election.
Sterling fell by around half a cent against the dollar to below $1.27 and also fell against the euro to just over €1.18.
Traders also increased their bets on an interest rate cut in August, seeing a near 50 percent chance that the Bank will act then, just four weeks after the general election.
However, September is still considered more likely.
British 10-year bond yields – the rate of return required by investors to lend to the government – fell to just over 4 percent, a two-month low. Bond yields fall as their prices rise.
In the stock market, the FTSE 100 rose 0.8 per cent, or 67.35 points, to 8,272.46, while the more domestically focused FTSE 250 added 0.6 per cent, or 117.67 points, up to 20,498.72.
Dan Coatsworth, investment analyst at AJ Bell, said: “Investors are looking for a future where inflation is back under control and rates start to fall, and the magic moment appears to be within reach.”
The Bank yesterday resisted cutting rates even though official figures the day before showed inflation falling to its 2 percent target for the first time in almost three years.
This is because it projects that inflation will rise again later this year, approaching 3 percent.
He is also concerned about underlying inflation data for the services sector (covering businesses from restaurants to hair salons), which stands at a still high 5.7 percent.
And wage growth of 6 percent is also seen as potentially putting upward pressure on prices.
However, the Bank’s latest minutes appeared to play down those fears.
Some rate-setters said utility inflation had been artificially boosted by increases in annual payments for mobile phone contracts and water bills.
And wage growth figures have been boosted by the increase in the national living wage in April.
The MPC members who voted in favor of a rate cut were Swati Dhingra and Deputy Governor Dave Ramsden.