UK inflation changes interest rate expectations

Traders have revised down their expectations for the Bank of England's key interest rate after an unexpected rise in inflation in the country, reducing their confidence in two possible cuts of 25 basis points each before the end of the year.

Now market participants expect to reduce the rate by only 49 bps by the end of the year. Last week, the probability that three more cuts of 25 bps would be made was estimated at 50%.

According to the latest data, consumer prices in the UK increased by 3% YoY in January, indicating an increase in inflation compared with the December level of 2.5% and was the highest since March.

During trading, the yield on ten-year UK government bonds increased by 5.1 bps, reaching 4.612%, the highest level since January 29. The pound sterling weakened against the dollar by 0.25%, reaching around $1.2582.

In early February, the Bank of England lowered its base interest rate by 25 bps, reducing it from 4.75% to 4.5%. At the same time, two of the nine members of the Monetary Policy Committee favored a more significant reduction of 50 bps.