Investors slashed on Tuesday their expectations of when the Bank of England will raise interest rates after UK inflation slowed in March, but analysts said the reaction could be overdone and partially reverse. The inflation rate fell for the first time since July, fuelling bets that the central bank would not raise interest rates to curb rising prices as quickly as had been anticipated.
The sterling overnight rate curve (Sonia) showed the first 25 basis rate hike was fully priced in by October, compared to August before the release of the data. Short sterling interest rate futures rose across the 2011 strip, implying a fall in expected interest rates, but analysts said the price moves could moderate in coming sessions.
The December short sterling contract was 0.13 points higher at 98.700, showing market expectations of interbank rates by the end of the year were 13 bps lower on the day. The UK rate repricing saw the 2-/10-year yield and swap curves push to their steepest versus the equivalent euro curves since November with short-dated euro rates pushed higher by expectations of higher European Central Bank interest rates. Similarly, the benchmark cost of sterling interbank borrowing fell, with three-month Libor down at 0.81938 percent while the equivalent euro rate was pushed higher to 1.2625 percent in anticipation of further ECB rate rises.
Banks raised their borrowing from the ECB by around 11 billion euros at its regular offering of one-month and one-week loans. Markets had forecast higher demand as banks enter on Wednesday a new maintenance period over which reserves must be deposited with the ECB.