UK 10-year gilt yield falls to new record low after BoE Carney hints at further easing

The UK gilts rallied on Friday after Bank of England Governor Mark Carney stated that the economic outlook has worsened and adds explicitly that some monetary policy stimulus will likely be needed over the summer and a Bloomberg report hinted at more European Central Bank easing.

The yield on the benchmark 10-year gilts fell nearly 8 basis points to 0.795 percent, yield on super-long 30-year bonds dipped 11 basis points to 1.615 percent by 09:45 GMT.

The BoE's governor Mark Carney said the central bank will probably have to ease policy over the summer and the referendum implications for the UK economy are not yet clear, but a 'material slowing' is now the BoE's central forecast.

He further added that uncertainty could remain elevated for some time and have more persistent drag on activity. He also sees risk of tighter financial conditions and of spillovers to other economies. This suggests that a 25 basis points bank rate cut to 0.25 percent can be expected during the August 4 MPC meeting.

Moreover, the Office for National Statistics released the third estimate of the UK’s first quarter GDP, which was confirmed at 0.4 percent for the first quarter of 2016 from 0.7 percent in the fourth quarter of 2015, which was in line with market expectations and was the 13th successive quarterly gain. On the annual basis, GDP growth was confirmed at 2.0 percent, also in line with expectations.

The UK current account balance of -32.6 billion pounds is not too far off from our sub-consensus prediction of -33.5 billion pounds, the market sought a narrowing to -27.1 billion pounds and follows a downwardly revised -34.0 billion pounds in the last quarter of 2015 (previous was -32.7 billion pounds). This latest outturn, which shows that the external current account position is in very bad shape, for a developed nation, is equivalent to -6.9 percent of GDP, and should be interpreted as a GBP negative development.

Moreover, 71 percent of economists expect the UK economy to experience a recession during 2016 or 2017, following the EU referendum, according to a new Bloomberg poll of 35 respondents. 82 percent foresee BoE stimulus, 73 percent expecting a rate cut, 60 percent a QE expansion and 47 percent credit easing measures. This compares with the market placing a 55 percent chance on the BoE cutting rates by 25 basis points i.e. taking the Bank rate to +0.25 percent by August, based on OIS pricing.

The UK's rating downgrades from S&P's and Fitch didn't have any effect, as the moves were surprising only by their speed. The S&P an American financial services company late Monday downgraded the UK's credit rating following its ‘Brexit’ vote by two notices from AAA to AA, with a negative outlook.

The Fitch rating agency also made a one-notch downgrade to AA from AA+, again with a negative outlook. The latter agency referred to the negative impact of leaving the EU on the UK's economy, public finances and political continuity.

It said the uncertainty will induce an 'abrupt slowdown' in short-term GDP growth and cut its GDP forecast to 1.6 percent for this year, from previous forecast of 1.9 percent and to 0.9 percent in 2017, from earlier forecast of 2 percent. The S&P slashed its GDP forecast for 2016-19 to 1.1 percent per year from previous 2.1 percent.

Interestingly, Moody's has not changed its UK rating of Aa1. These downgrades are no surprise due to previous warnings about such an eventuality.

Meanwhile, the FTSE 100 trading up 0.36 percent at 6,528 by 09:45 GMT.