(Bloomberg) -- Traders slashed the odds of a Bank of England interest-rate increase this week after data showed inflation unexpectedly slowed in the UK.

Swap-market pricing now implies less than a 50% chance for a quarter-point hike by the BOE Thursday, a significant shift from an increase being seen as all but guaranteed earlier this week. That also contrasts with economists’ expectations for another hike to 5.5%.

The market repricing is weighing on the pound, which fell to $1.2334, the weakest level since May. Government bonds rallied, with the yield on two-year notes — among the most sensitive to policy changes — falling as much as 15 basis points, the biggest drop in a month.

Money markets are now betting the BOE’s most aggressive string of rate increases in three decades is drawing to a close, with just one more hike to 5.5% priced by early next year. The prospect of a halt comes as Britain’s annual inflation rate fell unexpectedly to the lowest level in 18 months at 6.7%.

UK’s Unexpected Inflation Drop Opens Prospect of Rates Pause

Goldman Sachs Group Inc. economists changed their call on Thursday’s outcome following Wednesday’s inflation release and now expect a hold. They also lowered their forecast for the terminal policy rate to the current 5.25%, from 5.5% previously.

“While the BOE will no doubt try to project a higher-for-longer message, as the ECB has since its rate hike last week, history tells us that once the peak is in, forward rates move notably lower,” said Dominic Bunning, head of European currency research at HSBC Holdings Plc, who sees that sending the pound down to $1.18 by mid-2024.

(Updates with additional context from fifth paragraph.)

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