One Investor Will Hit the Jackpot if the BOE Cuts Rates Early

(Bloomberg) --

At least one investor is betting the Bank of England will soon deliver its first inter-meeting interest-rate cut in over a decade, as pressure grows on global policy makers to counter economic risks from the coronavirus.

A trader bought 100,000 options on short-sterling futures this week that will pay off if the U.K. central bank lowers rates by 50 basis points before March 18, when the positions expire. The last time the institution eased policy by that much was in March 2009, when it also unveiled a bond-buying program in order to stave off a recession. The BOE’s next scheduled meeting is on March 26.

The trade may also benefit from a smaller 25-basis-point inter-meeting cut as long as such a move is followed by signals for further action at the scheduled meeting. The trader has purchased call options that grant the right to take a long position in short-sterling futures, which would rally on a rate cut.

Overnight indexed swaps, commonly used to gauge rate expectations, are currently pricing in 24 basis points of U.K. rate reduction later this month, but don’t imply expectations for another full cut to follow.

The BOE’s benchmark rate is now at 0.75%, after a 25-basis-point increase in 2017 and 2018 each. It was last lowered in August 2016 -- by a quarter point -- in the aftermath of the Brexit referendum.

Markets are boosting bets that global central banks will ease policy in a coordinated response to the economic havoc brought on by the coronavirus. The Bank of Canada meets Wednesday, followed by the European Central Bank next week, the Federal Reserve and Bank of Japan the week after.

Group of Seven finance chiefs said Tuesday that they are ready to act to shelter their economies from the spreading virus, though they stopped short of spelling out what specific measures they would put into place.

To contact the reporter on this story: James Hirai in London at jhirai3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Anil Varma, Michael Hunter

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