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The prospects of a Bank of England interest-rate cut this month took another twist after a report showing surging optimism among U.K. manufacturers pushed market pricing for such a move below 50%.
The report from the Confederation of British Industry indicated that Boris Johnson’s decisive election win last month boosted sentiment by the most on record in the three months through January, with the lobby group’s gauge reaching the highest since 2014. That pushed up the pound, and left traders pricing in a 47% chance of policy easing this month, from 62% previously.
The reaction to the CBI survey, which is rarely seen as a market-moving release, highlights the focus traders are placing on any U.K. survey in the runup to the decision. A spate of weak data so far this year, along with dovish comments from policy makers, boosted market bets on an imminent move above 70%, although the euphoria has faded slightly following more positive reports this week.
The next key release is the purchasing managers’ indexes for this month, due Jan. 24. Those gauges can prove highly sensitive to with changes in sentiment, and economists have pointed out they have been historically correlated with the CBI numbers. The BOE will also likely draw heavily on intelligence from its own network of agents.
The big question for policy makers is whether an increase in optimism will translate into an improvement in activity. The CBI report suggested that is yet to happen, with output falling at a similar pace to December and a measure of total new orders dropping at the fastest pace since the financial crisis in the quarter.
“The boost to optimism in the manufacturing sector is very encouraging given the difficult environment that firms have faced in recent months,” said Tom Crotty, chair of the CBI Manufacturing Council. “However, it is clear that the sector is not yet out of the woods in terms of performance.”
The pound climbed 0.5% to $1.3115 after Wednesday’s release, while gilts fell, pushing the yield on 10-year bonds up by as much as two basis points.
–With assistance from Greg Ritchie.
To contact the reporter on this story: David Goodman in London at [email protected]
To contact the editors responsible for this story: Paul Gordon at [email protected], Brian Swint, Lucy Meakin
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