UK gilts plunge as BoE remains optimistic on inflation; monetary policy decision in focus

The UK gilts plunged Friday after the Bank of England in its August survey report on inflation expectations mentioned that the country’s consumer inflation to rise in the short-term.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 4-1/2 basis points to 0.804 percent, the super-long 40-year bond yield bounced 6 basis points to 1.318 percent and the yield on short-term 2-year bond climbed 1 basis point to 0.154 percent by 09:40 GMT.

The BoE survey report on inflation expectations in August concluded that 1-year inflation expectations to increase 2.2 percent, from the previous estimate of 2.0 percent in May. The 2-year inflation expectations remained unchanged at 2.2 percent, 5-year fell to 3.0 percent, from prior 3.4 percent.

Also, survey report mentioned that 19 percent of public expect interest rates to fall in the next 12 months, from previous 5 percent and 21 percent expect rates to rise, as compared to the 41 percent in the previous survey.

The Bank of England September monetary policy meeting is scheduled to be held on September 15. We still think the BoE MPC is inclined to move again, though, but not at next week’s meeting where policy will be left unchanged.   

Moreover, Bank of England Governor Mark Carney while addressing parliament, indicated that post-Brexit recession risks have receded and added that the central bank further room to maneuver monetary policy, if needed.

In addition, the market can actually heave a sigh of relief at news that the July construction output figure turned out at 0.0 percent m/m, in contrast to the central market expectation of -0.8 percent m/m, even though the annual rate of -1.5 percent y/y, vs -0.7 percent y/y in June is at its weakest since April 2013.

Meanwhile, the FTSE 100 traded 0.24 percent lower at 6,842.50 by 09:40 GMT.