Still Talking About BOE Hikes? Some Are Already Betting on a Cut

(Bloomberg) -- Barely a week after the Bank of England raised interest rates, some investors are betting on a cut.

They are building positions in money-market options that pay off if broad market expectations swing toward a rate reduction as early as March -- which happens to be the deadline for Brexit. Simply put, they are looking to profit on a potential policy response from BOE should the U.K. leave the European Union without a deal.

Traders bought 30,000 short sterling options due March 2019 at a strike price of 99.125 and sold the same quantity at 99.25 to reduce costs, exchange data show. This trade has an initial outlay of 1.125 million pounds ($1.45 million) and aims at a potential maximum profit of 8.25 million pounds.

Morgan Stanley rates strategists have flagged these risks and this week recommended buying gilts in the short term, as their economists are “more bearish than consensus on the evolution of GDP into the Brexit end-game.”

©2018 Bloomberg L.P.