UK markets are predicting the first interest rate cut from the Bank of England will come in September rather than August, with only two cuts this year.
The changes in expectations came after yesterday's stronger-than-expected US inflation reading, which sent the government bond market into a tizzy.
"The Treasury market had its worst day since the Kamikwaze Budget sparked turmoil in gilts," said Neil Wilson, chief market analyst at Finalto, referring to the infamous announcement by Kwasi Kwarteng under the short-lived government of Liz Truss in late 2022.
Two-year government bonds jumped about 20 basis points, "the most since the regional banking crisis a year ago", Wilson said. "The 10yr yield has also risen more than 20bps since the data was released and traders have now priced out a June rate cut."
"That is a big shift from the start of the year – the last mile is proving the hardest. The boulder in the pond is creating ripples elsewhere."
It comes after US inflation figures yesterday came in slightly higher than market expectations, prompting concerns that the US Federal Reserve and other central banks may wait longer to cut interest rates.
US consumer prices in March sped up to 3.5% from 3.2% the month prior and above forecasts of 3.4%.
Similarly, the core US CPI index, which excludes food and energy prices, reached 3.8%, the same as in February, but higher than estimates of 3.7%.
Some economists still expect the BoE to not follow the same path as the US Federal Reserve.
Ruth Gregory at Capital Economics was one such believer. "Even if the US Federal Reserve leaves its policy rate unchanged for longer than we expect, our forecast that inflation in the UK will be lower than in the US suggests this won’t prevent the Bank of England from cutting rates from 5.25% to 5.00% in June and to 3.00% next year," she wrote.
"But the Bank will be alive to the risk that inflation proves more resilient as it has in the US."
Her team's position is that both the Fed and BoE will cut in June, but she acknowledged that "there will be less pressure and urgency for the Bank to cut interest rates if the Fed does not".
The focus now shifts to the European Central Bank's interest rate decision at 1.30 pm on Thursday.