Market News

(Bloomberg) -- Investors are bracing for two more interest-rate cuts this year after the Bank of England eased monetary policy for the first time since 2020, spurring a rally in UK bonds.

Money markets priced around 40 basis points of additional cuts — which means odds now favor two more quarter-point reductions. The nine-member Monetary Policy Committee voted 5-4 to lower the key rate to 5%, though gave no specific guidance on where interest rates may settle, nor the speed of cuts needed to get there.

The yield on 10-year UK government bonds fell as much as seven basis points to 3.90%. The moves were compounded by US data suggesting the labor market is slowing there, potentially warranting more aggressive easing by the Federal Reserve. Sterling continued to trade lower, down around 0.4% lower at $1.2810.

“After today’s decision, and in anticipation of further cuts in an easing cycle, we expect bond yields to drift towards the lower end of their range,” said Van Luu, the global head of solutions strategy for fixed income and currencies at Russell Investments.

“Sterling has been strong this year, but the rate cut has put some pressure on the pound today. Investors have built up significant long positions in sterling, so it has been vulnerable to a short-term correction,” he added.

Now the BOE has cut rates for the first time since the start of the pandemic, investor focus will turn to the prospects of a meaningful monetary easing cycle, and whether the BOE’s efforts will diverge from other major central banks. The European Central Bank has already started lowering its key rate, while US Fed Chair Jerome Powell said a cut could come as soon as September.

The pound’s slump only dents its recent outperformance, with year-to-date returns beating all other Group-of-10 currencies. That reflects relatively high interest rates, an improving economic outlook and a stable UK government following last month’s election.

The BOE’s outlook “suggests caution to further cuts,” said Neil Jones, a foreign-exchange salesperson to financial institutions at TJM Europe. “This should imply an offered tone to the pound but with limited downside.”

--With assistance from James Hirai.

(Recasts to show bets on traders adding to rate cut.)