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BoE rate hike bets fade in markets after weak inflation

Published 18/07/2017, 17:01
Updated 18/07/2017, 17:10
© Reuters. FILE PHOTO: A man speaks on his phone as he walks past the columns of the Bank of England

© Reuters. FILE PHOTO: A man speaks on his phone as he walks past the columns of the Bank of England

LONDON (Reuters) - Expectations among British government bond investors that the Bank of England might hike interest rates soon faded on Tuesday after an unexpected fall in British inflation, the first since October last year.

Gilt yields fell by the largest amount in over a month following the data which showed the consumer price index rose an annual 2.6 percent in June, a lot less than the 2.9 percent increase predicted in a Reuters poll.

Five- and 10-year gilt yields (GB5YT=RR) fell 6 basis points on the day to 0.60 percent and 1.21 percent, marking their lowest levels since June 28.

Short sterling interest rate futures also rose after the data, another sign that investors were pushing back their expectations for when the BoE might raise rates.

Gilt yields have retraced most of their gains since late June when BoE Chief Economist Andy Haldane said he could soon join a minority of rate-setters who want higher borrowing costs, blowing apart the consensus on Monetary Policy Committee.

Since then, economic data have largely come in weaker than expected, raising questions about the likelihood of a rate hike any time soon. The BoE's next announcement on interest rates is due on Aug. 3.

"Today's inflation figures reinforce our view that the Bank of England will be content to hold policy steady when it meets in August," said Investec economist Victoria Clarke.

Overnight index swaps dated to MPC meetings suggested there is now only a roughly 1-in-5 chance of a rate hike by the end of the year, compared with a 1-in-2 chance a couple of weeks ago, according to Reuters calculations.

© Reuters. FILE PHOTO: A man speaks on his phone as he walks past the columns of the Bank of England

The yield spread between 10-year British (GB10YT=RR) and German government bonds stood at 65.2 basis points, the lowest since around late August 2016 and down around 4 basis points on the day.

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