City traders are betting that interest rates have now peaked, as new economic data suggests the Bank of England’s bitter medicine is continuing to slow down demand.
Markets had seen the question of whether the Bank of England’s interest rates have peaked as effectively a 50/50 call ever since it took the decision to pause its cycle of 14 consecutive rate hikes last week.
But as the Bank’s 2 November decision approaches, confidence has grown that 5.25% is likely to be the peak.
Markets are pricing in a roughly two-in-three chance that rates have already peaked. The implied odds of a pause at next week’s meeting are now greater than 90%.
The repeated interest rate hikes came after inflation rocketed last year and has proved “stickier” than first thought. But more recent data has led to increased hopes that the Bank’s past hikes are having an effect, and inflation will continue to fall towards the Bank’s 2% target.
October’s Flash PMI survey, released this morning, suggested the UK’s economic slowdown was continuing into the final quarter of the year, which is likely to slow the pace of price rises.
“‘Overall, the PMIs paint a picture of a subdued economy that is feeding through to lower employment growth and slowing inflation,” RSM UK economist Thomas Pugh said. “If this weakness is reflected in the official data over the next few months, it would suggest that the Monetary Policy Committee’s job is largely done; and keeping interest rates at current levels will be sufficient to bring inflation back to the 2% target.”
Meanwhile, the ONS this morning revealed the unemployment rate was steady at 4.2% , but a rise in the number of people classed as ““economically inactive” convinced traders that the jobs market continues to loosen.
However James Smith, developed markets erconomist at ING, cautioned against reading too much into the new data.
He said: “This morning’s delayed jobs numbers and the latest PMI indicate that the economy is cooling, albeit gradually, but it’s also clear that neither dataset should be taken too literally.”
It might still be a long time before interest rates come down. City traders believe the Bank is not likely to cut interest rates until Autumn of next year, as the Bank is expected to keep rates high for a long time.
Economists expect October’s inflation rate to fall dramatically when it is published next month, from the current rate of 6..7% to close to 5% as the lower energy price cap is likely to drag the rate down.
