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Traders Bet BOE Will Cut Rates Before Year-End to Shore Up Economy

(Bloomberg) -- Traders are betting the Bank of England will reverse course and cut its key interest rate later this year to shore up a flagging economy.

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For the first time since August, money-market wagers show a quarter-point rate cut is fully priced in by year-end. Rates are still expected to increase next month before peaking at around 4.5% in the summer.

The repricing comes after a string of economic data pointed to growth stalling and inflation easing, and shows the market is beginning to doubt that the UK central bank will be able to keep rates that lofty for long. The bank’s policy rate currently sits at 3.5%, the highest in more than a decade.

“We are turning more positive on the economic prospect for Europe, but still remain negative on the UK,” said Mohit Kumar, a rates strategist at Jefferies. “For the BOE, even if we get a 50 basis-point hike in February, it would be a dovish 50 basis points.”

Figures Wednesday revealed UK factory price inflation rose at the slowest pace in almost a year, following separate releases Tuesday that signaled weak services industry sentiment and factories curtailing production at record rates.

Read more: UK Recession Risks Grow With Record Deficit and Output Slump

The end of hiking cycles are coming into sight for many developed economy central banks, prompting speculation over the likely trajectory of policy beyond the peak rate. While economists have argued the BOE may be slower to cut rates versus peers, with factors including a scarcity of workers that is keeping inflation sticky, some market strategists are taking a different view.

“Inflation is clearly on a downward trajectory,” said Kenneth Broux, a strategist at Societe Generale SA. “If you have a recession on top, there is no reason the BOE can’t start cutting interest rates by year-end.”

A half-point hike from the BOE at its meeting next week is still almost considered a done deal by markets, according to swaps tied to policy meeting dates.

Daniela Russell, head of UK rates strategy at HSBC Holdings Plc, puts forward the argument that policy makers are less likely to raise interest rates so much in the first place if they suspect cuts may be required only a few months later.

“We think the Bank will hike by only another 25 basis points next week, and then stop. Even if they do 50 basis points, they look close to pausing,” she said.

The bets on rate cuts helped UK bonds outperform their German equivalents for a fifth session, with yields on 10-year gilts down five basis points at 3.22%. Next week will also bring rate meetings from the the European Central Bank and Federal Reserve.

--With assistance from Libby Cherry and Sujata Rao.

(Adds Societe Generale, HSBC comments from seventh paragraph.)

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