LONDON: Faster inflation would normally fuel expectations for higher interest rates. In the United Kingdom, where price gains are the quickest in three decades, traders are betting on rate cuts.

       They’re paying heed to a warning this month from the Bank of England (BoE) that surging costs for energy, clothing and food could lead to a weaker growth outlook.

       Money markets show wagers for more than a quarter-point in rate decreases within the next two years, the most aggressive positioning since 2007. It’s a stark contrast from last month, when a bumper 50-basis-point (bps) hike by May was seen as a done deal.

       Those bets evaporated by the end of February amid Russia’s invasion of Ukraine, and have not been fully revived by data last week showing the consumer price index in February hit levels last seen in 1992.

       Instead, traders are bracing for the impact of the current cycle of policy tightening –which has delivered 65bps in hikes since December – on the longer-term growth and price trajectory.

       “Ironically, the higher consumer price index (CPI) now reinforces the medium-term disinflationary narrative,” said Antoine Bouvet, a strategist at ING Bank NV, adding “CPI readings are not as impactful in part due to the string of positive surprises”.

       The CPI has beaten median estimates in Bloomberg economist surveys since October, gradually eroding the element of surprise each time.

       In that time, money markets at one point wagered on more than a percentage point of rate hikes by the end of this year, before rolling it back in November after policy makers surprisingly held the bank rate steady as Omicron spread.

       Traders ramped up bets again in the aftermath of the BoE’s rate increase in December, its first since 2018, before trimming them after Russia invaded Ukraine.

       Following Wednesday’s inflation data, money markets now price about 139bps of further tightening this year.

       The BoE’s quarter-point rate hike on March 17, which took borrowing costs back to their pre-pandemic level, was accompanied by policy makers warning the war in Ukraine may push inflation well above 8% later this year.

       Yet, they also tempered the outlook by saying that a further tightening of policy “might be” appropriate in the coming months, a softening from the wording in February, when they said such a move was “likely.”

       The BoE forecasts CPI inflation to fall back to above its 2% target in two years. — Bloomberg