Jan 7 (Reuters) - A dovish repricing in UK interest rates remains a concern for sterling. Though markets continue to price in two 25bp cuts this year from the Bank of England, risks lean towards greater easing which could be a headwind for GBP going forward.
As mentioned previously, it is easier for markets to shift from two cuts to four cuts than it is go from two to zero.
The Bank of England has been cutting the bank rate at a quarterly pace since August 2024, in 25bp clips. After a surprise dovish 6-3 vote split at December meeting, the market attaches a 68% probability for another 25bp cut at the February meeting.
While gilt yields have continued to trend higher, with the benchmark 10-year trading at the 2024 highs and nearing the 2023 peak at 4.75%, this only adds to the case for a dovish repricing. The move higher in yields will have tightened financial conditions further and thus the market is essentially doing the Bank of England’s job for it.
Given the risk of having policy too tight, there is likely
to be less resistance among policymakers to signal a lower rate
profile than is currently priced in.
UK Dec 25 BoE pricing
(Justin McQueen is a Reuters market analyst. The views expressed are his own.)