(Bloomberg) — The pound slid and gilts rallied after inflation data backed up Bank of England policy maker Michael Saunders’ call for urgent stimulus to boost the U.K. economy.
Sterling fell against all its peers and 10-year government bond yields dropped to the lowest in more than a month as the data fueled bets that the central bank will lower interest rates this year. Money markets are now fully pricing in a full 25-basis-point rate cut for June, compared to November a day ago, and see a 62% chance of a move this month.
Saunders’ view on the need for more accommodative policy comes just days after BOE Governor Mark Carney said Britain’s economic growth had slowed below potential and that the Monetary Policy Committee had discussed the merits of near-term stimulus.
“There is more room for easing expectations to rise should incoming data disappoint and that could keep short-term sterling downside risks intact,” said Manuel Oliveri, a currency strategist at Credit Agricole (PA:CAGR) AG.
The pound fell 0.2% to $1.2998 by 9:40 a.m. in London, and also slipped 0.2% to 85.65 pence per euro. Benchmark 10-year yields extended their drop to seven basis points at 0.66%.
U.K. annual inflation came in at 1.3% for December, versus expectations for 1.5%, data showed. If the U.K. postponed easing policy this could spur risks “of a low inflation trap,” Saunders said earlier on Wednesday.