The UK gilts slumped on Friday after the Bank of England surprised investors by keeping its bank rate unchanged. The yield on the benchmark 10-year gilts rose 3 basis points to 0.825 percent, yield on super-long 30-year bonds also jumped 3 basis points to 1.650 percent and the yield on short-term 2-year bonds bounced 3 basis points to 0.176 percent by 09:00 GMT.
The Bank of England also surprised markets by keeping its official bank rate unchanged at 0.5 percent, despite Governor Mark Carney’s earlier announcement of his intention to inject monetary stimulus due to rising market turmoil after UK left European Union last month.
The accompanying minutes show an eight to one vote in favour of keeping policy unchanged this month, with arguably the most dovish member of the MPC, Gertjan Vlieghe, preferring to reduce the Bank Rate by 25 basis points immediately, to 0.25 percent. The minutes, however, state explicitly that most members expect monetary policy to be loosened in August.
Moreover, Bank of England Chief Economist and Monetary Policy Committee member Haldane said that monetary policy is a part of the collective response to protect economy and will decide the size and extent of stimulus in August. Said the central bank easing needs to be delivered promptly, muscularly and need to do more to cushion negative shocks.
In terms of data, UK May construction output slumped by 2.1 percent m/m, far worse than the market consensus prediction of a 1.0 percent m/m decline and translates to -1.9 percent y/y. The bad news however is slightly counteracted by the upward revision to the April figure to +2.8 percent m/m (-0.6 percent y/y) from +2.5 percent previously (-3.7 percent y/y). This is further evidence of the extent to which the construction sector has been battered by the uncertainty that prevailed in the run-up to the EU referendum.
Lastly, investors will remain keen to focus on the wave of economic data next week, including CPI, PPI, unemployment rate, claimant count change, retail sales, PMI. Meanwhile, the FTSE 100 trading lower 0.04 percent at 6,652 by 09:20 GMT.
