LONDON (Reuters) - The Bank of England kept its key interest rate at a 15-year high of 5.25% on Thursday and said British interest rates needed to stay high for 'an extended period.'
That prompted a retracement higher in government bond yields that had fallen sharply a day after the U.S. Federal Reserve signalled it would cut U.S. rates next year.
There was no discussion of cutting interest rates, and the BoE said it remained concerned that inflation in Britain will continue to be stickier than in the United States and the euro zone.
MARKET REACTION:
FOREX: Sterling rallied after the BoE decision and was last trading 0.75% higher on the day at $1.2710, compared with $1.2665 just before the announcement. Against the euro, the pound was trading at 86.04 pence compared with 86.29 earlier.
BONDS: British gilt yields trimmed some of their earlier sharp fall. Two-year gilt yields were last down 7 bps at 4.306%, up from 4.24% just before the decision. The 10-year gilt yields was at 3.77%, up from 3.72% earlier, and still down roughly 6 bps on the day.
STOCKS: London's FTSE 100 index slightly trimmed gains and was last up 1.86%.
COMMENTS:
GUY GITTINS, CEO, FOXTONS GROUP, LONDON:
"We’re now seeing clear evidence that the property market has weathered the storm of economic uncertainty this year and is now taking positive steps in the right direction.
"Since the Bank of England first decided to hold rates at 5.25%, mortgage approval numbers have increased, sellers have continued to return to the market and UK house prices have climbed consistently on a month to month basis.
"While hopes of a rate reduction were probably a tad optimistic this side of the Christmas period, a third consecutive decision to keep the base rate held will only add to this growing property market optimism."
ATHANASIOS VAMVAKIDIS, GLOBAL HEAD (LON:HEAD) G10 FX STRATEGY, BOFA GLOBAL RESEARCH, LONDON:
"The main message remains that rates will remain high for as long as it takes, which effectively is a push-back to market pricing early cuts.
"It was broadly as markets were expecting, but looks hawkish compared with the very dovish Fed yesterday."