Wednesday May 14, 01:06 PM
UK short sterling futures stay under pressure as BoE ramps up inflation forecast
LONDON (Thomson Financial) - UK short sterling futures remained under pressure after the Bank of England's latest Inflation Report ramped up its inflation forecast, further dampening hopes for a rate cut next month from the central bank.
At 12.50 p.m., the June short sterling future was trading lower at 94.17, from 94.21 prior to the report, while the September short sterling future slipped to 94.25 from 94.31.
The BoE effectively put markets on warning for a period of stagflation as it warned that inflation could rise to near 4 percent by the autumn, while saying there was a high risk that GDP growth could fall to an annualised rate of 1 percent by the end of this year.
'A June cut now looks pretty unlikely and any further loosening will be modest in the foreseeable future,' said Jonathon Loynes, chief European economist at Capital Economics.
In its quarterly Inflation Report, the central bank said its base case scenario is that the annual CPI (NYSE: CPY - news) inflation rate will likely hit 3.6 percent this autumn if interest rates fall in line with market expectations.
However its fan chart showing the range of forecast probabilities suggests there is a real risk inflation could rise beyond 4 percent.
If interest rates remain at 5.00 percent though, then the BoE expects inflation to fall to the 2.0 percent target, while GDP growth would fall below 1 percent this year and only recover to just above 2 percent in two years time.
This suggests not only that interest rates are unlikely to fall next month, but that there will be far fewer cuts than markets had hoped, possibly none at all.
'The market, having been generally more dovish than us, has now swung to become more hawkish with not even one cut fully priced before year end,' said Daragh Maher, strategist at Calyon.
The 10-year gilt also suffered following the release of the Inflation report, trading down 0.84 at 101.43.
|
Send Article by Email
