LONDON (Reuters) - Investors added to their bets on Bank of England interest rate cuts later this year after data on Wednesday showed Britain's consumer price inflation was its slowest in nearly two and a half years.
Interest rate futures were pricing a roughly 63% chance that the BoE will cut Bank Rate to 5.0% from 5.25% - its highest since 2008 - at its June meeting, up from about 58% before the inflation data. They were fully pricing in a 25 basis-point cut in August.
British inflation slowed to 3.4% in February from 4.0% in January, according to data from the Office for National Statistics. Economists polled by Reuters had mostly expected a drop to 3.5%.
Services inflation, which the BoE is watching closely, dropped to 6.1% from 6.5% as the central bank had expected.
Five-year gilt yields were down by 5 basis points at 3.921% having earlier touched their lowest level in a week at 3.990%.
James Smith, an economist with ING, said the chances of a rate cut by the BoE's Monetary Policy Committee as early as June depended on a bigger-than-expected slowdown in services inflation and wage growth data between now and then.
"But more likely we think the Committee will wait for a few more numbers and also a new round of forecasts, which makes August a more likely candidate for the first rate cut," Smith said in a note to clients.
Markets are now pricing in about 70 basis points of BoE rate cuts by December this year, or nearly three separate quarter-point reductions, compared with about 67 basis points before the British inflation data was published.