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Markets pricing in 78% chance of interest rate cut next week

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Written by: Paloma Kubiak
07/07/2016
The swaps market is pricing in a 78% chance that interest rates will be cut as early as next Thursday, up from the 50% chance for the move in July, given just last week.

Swap rates heavily influence the pricing of fixed rate mortgages offered by lenders such as banks and building societies.

Low and negative interest rates are good news for borrowers as the cost of both fixed rate mortgages and Bank Base Rate trackers would fall, but it’s bad news for long-suffering savers.

Following on from the Bank of England governor Mark Carney strongly hinting that rates will be cut this summer, financial markets priced in a 50% chance that it would happen in July with a 15% chance they would turn negative in the course of the next year.

It also gave a 65% chance of a cut by August, and an 80% chance of a cut by the end of the year.

But now with the economic data deteriorating and nervousness still present in the market, it looks probable that the Monetary Policy Committee will recommend that immediate action is taken.

The overnight index swaps (interest rate swaps in which the variable overnight rate is exchanged for a fixed rate) now imply the following probabilities:

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

Ben Brettell, senior economist at Hargreaves Lansdown, said: “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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