(Bloomberg). — After the unexpected decline in UK private sector growth indexes, investors fled to government bonds to protect their investments. This was to calm fears about a possible recession.

This led traders to reduce their bets about further interest rate hikes by the Bank of England due to the possibility that rising borrowing costs would halt growth. The fell nearly 1% against the dollar, reversing Monday’s gains and making it the most volatile Group-of-10 currency this week.

Short-dated government debt was piled up by traders, which drove down the 2-year gilt yield 12 basis points, to 1.45%. This is its largest drop in just two weeks. Bonds are seeing a benefit as the money market expects about 15 basis points fewer rate hikes in 2019, a day following Andrew Bailey’s statement by BOE Governor Andrew Bailey that there will be a cost of living crisis.

“After Governor Bailey’s not-so-hawkish comments yesterday, today’s PMI figures underscore the real income shock on the UK economy,” said Geoffrey Yu, a senior foreign-exchange strategist at Bank of New York Mellon. “If we had to pick one G-10 central bank most likely to pause soon, it would likely be the BOE.”

Learn more: UK Facing Recession, as Companies Suffer from Soaring Prices

S&P Global’s index of private sector growth unexpectedly slumped in May to levels last seen in February 2021, when coronavirus lockdowns were still in place, the firm said Tuesday. This slowdown, which was fourth in size on records and more severe than any seen prior to the pandemic, occurred at a time when the economy is struggling. 

“These are stunning decreases over such a short period of time,” said Christopher Dembik, head of macro analysis at Saxo Bank, adding that inflation is still “out of control” and a technical recession is likely in the UK this year.

The data gives policy makers bandwidth for just one more 25 basis-point hike at June’s meeting at a maximum, according to Simon Harvey, head of currency analysis at Monex Europe. Four back-to-back increases have been implemented by the BOE to combat spiralling inflation. 

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