Gilts Climb as U.K. Markets Slash Bets on BOE May Rate Hike

(Bloomberg) -- U.K. government bonds rallied and the pound fell as investors slashed bets on an interest-rate increase by the Bank of England next month.

Money markets in the U.K. now see about a 56 percent chance of a hike when the BOE meets on May 10, a sharp drop from 82 percent on Thursday. BOE Governor Mark Carney said in an interview with the BBC late on Thursday that when the monetary-policy committee meets, officials would be “conscious that there are other meetings” at which they could act this year.

Gilts Climb as U.K. Markets Slash Bets on BOE May Rate Hike

“Just when you thought it was safe, Carney casts some doubt over a May rate rise,” said Jason Simpson, a rates strategist at Societe Generale SA. “This should provide some support to the short end of the curve and potentially make it a little more sensitive to upcoming data.”

The yield on benchmark 10-year gilt yields dropped three basis points to 1.49 percent as of 12:30 p.m. in London, paring a fall of as much as seven basis points at the open. The pound traded 0.2 percent weaker at $1.4064, taking its losses over four days to nearly 2 percent. It slipped 0.1 percent to 87.52 pence per euro.

Nordea Bank AB is recommending that investors short the pound, looking for the currency to drop to 91 pence against the euro over the next three to five months. A decision not to raise rates in May would give a massive tailwind to such a position, Andreas Steno Larsen, a global currency strategist at the bank, said ahead of Carney’s comments.

Should Carney’s view mark a turnaround, it would come off the back of some disappointing economic data, including the U.K.’s consumer-price growth cooling to its slowest in a year. Earlier this week, money markets already reduced bets for a second hike in November. BOE Monetary Policy Committee member Michael Saunders stuck to his guns at a speech in Glasgow on Friday, stating that the need for loose monetary policy is less acute.

Carney’s comments have untied the MPC’s hands after the soft inflation data, with the chances of a May move now a coin toss, said Alan Clarke, a London-based economist at Scotiabank.

“He is the unreliable boyfriend,” said Clarke. “It wouldn’t be a surprise for him to come out dovish like he did yesterday and then vote for a hike in May and frustrate us all.”

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