Megan Greene, a member of the Bank of England's external monetary policy committee, said recently that the market is wrong to link expectations for a UK interest rate cut too closely to the United States. The reason is that, unlike the United States, inflation in the United Kingdom is more stubborn and the room for interest rate cuts is relatively limited.

Green admitted that the recent market expectations for a decline in UK borrowing costs are mainly due to expectations for the Federal Reserve to increase interest rates, rather than an objective assessment of domestic price pressures in the UK. She believes that although the latest data shows that US CPI inflation rose again in March, until Thursday's trading, the market generally believed that the Bank of England would cut interest rates earlier and more significantly than the Federal Reserve this year.

However, Green added:

There are differences in macroeconomic fundamentals and inflation dynamics between the United Kingdom and the United States, and the risk of continued inflation in the United Kingdom is greater. Markets are betting in the wrong direction on UK interest rate cuts.

The main difference is that the United States' potential growth this year is estimated at 2.2%, while the United Kingdom's potential growth is only 1% due to weak productivity growth and constrained labor supply. Green explained:

That means the U.S. economy can handle more demand without triggering inflation.

On the other hand, the UK has also been hit harder by energy-related inflation. The cost of living crisis has seen wage growth climb to levels of 6-7% in the UK, compared with just 4-5.5% in the US.

Green pointed to stubborn wage growth as an important component of services sector inflation. The current service industry inflation rate in the UK exceeds 6%, while in the United States it is below 4%.

Market momentum is moving towards pricing in a delay in the Fed cutting interest rates as US growth remains solid and a cut in UK rates is far from overdue in my view.

The latest data showed that the two-year UK government bond yield climbed 8 basis points to 4.44%, after surging 16 basis points the previous day. The two-year U.S. Treasury yield was basically steady on the day after surging 23 basis points on Wednesday.

After Green's speech, futures market traders lowered their expectations for the Bank of England's interest rate cut this year to less than 50 basis points, and postponed the first interest rate cut to November.