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Markets suggest strong chance of base rate cut next week

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Markets are pricing in a 78 per cent chance of a cut to Bank of England base rate next week, after the governor signalled his willingness to consider further monetary easing.

There has been a steady stream of price reductions by mortgage lenders which have been taking advantage of lower swap rates to launch more competitive products for borrowers.

Hargreaves Lansdown senior economist Ben Brettell says: “Following on from Mark Carney’s strong hint last week that rates will be cut this summer, financial markets are now pricing in a 78 per cent chance that this will happen next Thursday.

“Initially August had looked more likely, but with economic data deteriorating and markets still nervous, it now looks probable the MPC will adjudge that immediate action is warranted.”

Yesterday, overnight index swaps were implying the following probabilities:

  • 78 per cent chance of a cut next week
  • 86 per cent chance of a cut by August, with a 27 per cent chance rates will be 0 per cent by then
  • 89 per cent chance of a cut by December, with a 34 per cent chance rates will be 0 per cent and an 8 per cent chance rates will be negative by then

Brettell adds: “Since the referendum Mark Carney has shown he’s very much on the front foot trying to deal with the economic implications of Brexit.

“Last week he expressed confidence the UK economy would prove resilient enough to deal with the challenge, but also said that the Bank’s forecast of slowing growth in the event of a vote to leave the EU had now become its central case, and that he believed rates would have to be cut over the summer.

“Yesterday he announced the Bank would use its new ‘macroprudential’ powers, cutting the amount of capital required to be held by banks in an attempt to stimulate lending.”

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