Gilts Tumble as Bank of England Signals Faster Hiking Pace

Updated on
  • Five-year gilt yields gain most in almost a month on BOE
  • Market now questioning how many hikes BOE will deliver: Nomura

BOE Keeps Key Rate at 0.5%

U.K. government bonds slumped as the Bank of England’s ‘Super Thursday’ statement and press conference provided a hawkish signal for interest-rate expectations.

Gilt yields rose to multi-year highs and sterling snapped four days of losses as the BOE said it may raise rates sooner and at a faster pace than previously expected. Money markets are now fully pricing a 25-basis-point increase in August, compared with earlier bets for a hike in November, and see a 79 percent chance of a move in May.

“It isn’t just a tactical hawkishness about a particular month, but a more structural hawkishness, so the market also has to question how many hikes will eventually be delivered,” said Andy Chaytor, head of European rates strategy at Nomura International Plc. “I’m surprised at how much the curve is flattening into the long-end.”

Five-year notes led bond losses as yields touched the highest since January 2016 and were up nine basis points to 1.10 percent by the European close. Ten-year yields rose seven basis points to 1.62 percent. The pound was up 0.4 percent to $1.3936, paring gains after climbing as much as 1.3 percent.

Gains Tempered

The central bank left its rate at 0.5 percent as expected and raised growth and inflation forecasts. While the pound was boosted by the central bank’s tone, sterling could see gains tempered by the fact the BOE’s policy path remains closely tied to progress in the Brexit talks, according to Viraj Patel, a currency strategist at ING Groep NV.

In a press conference, Governor Mark Carney said that while the bank sees more tightening than it did in November, this was a “crucial” year for the Brexit negotiations and everyone would be better informed next year, which would have an effect on the central bank’s thinking. Rises will be gradual and the bank is not tied to a specific rate path, he said.

It was a “Brexit-contingent hawkish signal,” said Patel, among the most bullish forecasters on the pound. The greater prospect of a rate increase in coming months “reinforces our $1.45 target for cable in the first quarter of 2018.”

— With assistance by Anooja Debnath

(Updates with pricing from second paragraph.)
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