Gilts Climb as Cautious BOE Signals Modest Tightening Prospects

(Bloomberg) -- U.K. government bonds gained and the pound erased an earlier advance against the dollar after the Bank of England kept interest rates on hold and maintained a cautious economic outlook.

Yields on 10-year gilts fell to the lowest level since mid-September as investor expectations for a late-2018 rate hike eased marginally after the BOE decision. Money markets currently price a 95 percent probability of a 25-basis-point tightening for November next year, compared with just over 100 percent on Wednesday. The central bank reiterated that “further modest increases” in rates would probably be needed if the economy stayed on track, without elaborating further.

The BOE voted unanimously to leave its benchmark rate unchanged, as forecast by all economists in a Bloomberg survey, and repeated a line that any rate increases will be limited and gradual. Some analysts had predicted a slightly hawkish rhetoric given signs of progress in the Brexit talks in recent weeks. The central bank said that while Brexit remains the “main challenge” for monetary policy, latest developments reduce the chance of a disorderly exit.

Gilts saw “probably more a relief rally that there was nothing hawkish” in the BOE statement, said Jason Simpson, a strategist in London at Societe Generale SA. The BOE’s comments were “bang in line with the November message and so exactly what we should have expected.”

The yield on 10-year gilts fell as much as three basis points to 1.18 percent, the lowest level since Sept. 14. Sterling was little changed at $1.3417 as of 1:53 p.m. in London, having touched $1.3466, the highest level this week. It was steady against the euro to 88.12 pence.

‘Risks Prevail’

Brexit-related uncertainty has weighed on sterling after a lawmaker vote late on Wednesday went against Prime Minister Theresa May, potentially making it more complicated for her to clinch a final deal with the European Union at the end of discussions in 2019.

“Despite the recent progress, uncertainty is still high” in Brexit negotiations, said Thu Lan Nguyen, a currency strategist at Commerzbank AG. “As long as these are not resolved and we have better idea of the future relationship between the U.K. and the EU, I wouldn’t expect too many impulses from the BOE. Against this background, downside risks in sterling prevail also in the next year to come.”

To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Scott Hamilton

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