Weaker employment accelerates easing expectations; traders increase bets that the Bank of England will cut rates twice this year.

After the UK unemployment rate rose to a nearly five-year high and wage growth slowed, traders increased their bets on Bank of England rate cuts.

The money market has now fully priced in two rate cuts of 25 basis points each within the year, meaning the benchmark interest rate is set to fall to 3.25% for the first time in this easing cycle. At the beginning of this month, the probability was only 50%. The pound fell more than 0.5% against the US dollar to $1.3553, the lowest since February 6.

The UK Office for National Statistics said on Tuesday that the unemployment rate rose to 5.2% in the last quarter of last year, higher than the median estimate of analysts surveyed by Bloomberg. The Bank of England’s preferred wage measure—the regular wage growth rate in the private sector—fell to 3.4%, the lowest in more than five years.

Market bets on further rate cuts rose sharply at the beginning of this month, after the Bank of England missed a rate cut by just one vote in a recent meeting, and Governor Andrew Bailey also appeared to support market expectations for a March rate cut. The data released on Tuesday may convince policymakers that inflationary pressures in the labor market are rapidly easing, creating room for further cuts.

The swap market shows there is nearly an 80% chance of a 25 basis point rate cut next month, up from about 70% on Monday. Markets expect an April rate cut is basically confirmed.

Bank of England Deputy Governor Sarah Breeden said last week that “there is reason to expect” another 25 basis point cut by the end of April. This suggests that a loosening labor market means the persistence of wage and price inflation should be weakening.

Editor: Li Zaofu