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Traders bet on interest rate being cut to 4% by end of this year

Traders now value the Bank of England's benchmark rate, peaking at 4.5% over the summer before drifting towards 4% by the end of 2023.

Traders bet on lower interest rates this year: Bank expected to support economy amid new signs inflation is under control

Money markets are betting that interest rates will start falling this year as inflation fears are overtaken by the need to support Britain’s struggling economy.

Traders are now pricing the Bank of England’s benchmark rate, peaking at 4.5% over the summer before drifting down to 4% by the end of 2023.

It comes after the latest signs of inflation being brought under control, with official figures showing factories slashed prices in December at the fastest rate since April 2020.

Meanwhile, a leaked private memo from the Office of Budget Responsibility showed the fiscal watchdog was close to cutting its growth forecast.

It comes a day after a monthly business survey showed the UK had a worse than expected start to the year, with strikes and cost of living pressures adding to fears of a impending recession.

Stuart Cole, macroeconomist at Equiti Capital, said: “The data was not good. The bigger picture is today’s producer price inflation figures, which showed that inflationary pressures were retreating and which cast doubts on the extent to which the Bank will also raise interest rates.

Kenneth Broux, strategist at Societe Generale, told Bloomberg: “Inflation is clearly on a downward trajectory.

“If you have one more recession, there’s no reason the Bank can’t start cutting interest rates by the end of the year.”

Market bets show that the Bank is expected to raise its main interest rate by half a percentage point to 4% next week.

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Further rises of 0.25% are then expected before peaking at 4.5% before falling.

It is currently 3.5% and in December 2021 it was 0.1%.

But a far cry from fears sparked by last September’s disastrous Kwasi Kwarteng mini-budget that rates could hit 6%, and signals that the end may be in sight of the Bank’s aggressive fight against inflation.

The rate hikes have added to recession fears as homeowners and commercial borrowers face much higher loan repayments.

Inflation is still in double digits, but is on the decline after hitting a four-decade high of 11.1% late last year.

Figures released by the Office for National Statistics yesterday showed ‘ex-factory’ prices fell by 0.8% between November and December, the biggest fall in the monthly rate since April 2020.

Inflation rose across the world last year, but has started to fall in the United States, the euro zone and the United Kingdom.

This prompted central banks to rein in sharp increases of up to 0.75 percentage points. Now the markets focus on when the bulls will stop and then start falling.

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Some fear that the battle against inflation, which intensified after Russia’s invasion of Ukraine, pushed up food and energy prices, is not over.

If the reopening of the Chinese economy increases demand for commodities, there could be upward pressure.

The pound initially fell against the dollar yesterday before recovering to end around half a cent higher, just below $1.24.

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