UK gilts slump on BoJ’s surprise policy decision; BoE meeting eyed next week

The UK gilts slumped on Friday after the Bank of Japan remained on hold at its two-day monetary policy meeting, rolling a sense of disappointment among market participants who were expecting a deeper policy easing.

The yield on the benchmark 10-year gilts rose 1-1/2 basis points to 0.728 percent, the yield on super-long 30-year bond jumped 1 basis point to 1.611 percent and the yield on short-term 2-year bonds bounced 1/2 basis point to 0.132 percent by 10:40 GMT.

The Bank of Japan in its monetary policy decision disappointed markets by keeping its key interest rate unchanged at prevailing minus 0.1 percent. Also, the central bank kept its base money target at 80 trillion yen as well as buying of Japanese bonds.

However, the BoJ announced to increase ETF purchases at an annual pace of 6 trillion yen, up from the current 3.3 trillion yen. This decision was supported by 7-2 votes as board member Takahide Kiuchi and Takehiro Sato opposed the majority decision.

The central bank in its statement proposed to increase the size of the lending programme that provides dollar funding to Japanese financial institutions and conducts comprehensive assessment of effects of QQE with negative rate policy at next rate review. It further added that the governor Haruhiko Kuroda as chairman of board instructed staff to prepare deliberations on assessment at BOJ's next meeting.

Moreover, the Bank of England is expected to ease interest rates at its monetary policy meeting scheduled for August 4. The Brexit vote last month gave a shock to the financial markets, which made investors speculate that the central bank would cut rates or inject stimulus for stabilising financial markets turmoil.

According to recent Reuters poll, the BoE would hold off for now on restarting its asset purchase programme. All but three of the 49 economists surveyed since Friday expect the Bank to cut at least 25 basis points from the already record low 0.5 percent it has sat at since early 2009. The median forecast was for a cut to 0.25 percent.

While 17 of 36 said the 375 billion pounds quantitative easing programme that was wound down in 2012 would also be restarted by the MPC next week, 19 said it would not, they added.

Meanwhile, the British pound tumbled to more than 3 decades low against the US dollar earlier in July in the aftermath of the Brexit vote, which clouded the UK’s economic outlook and increased bets on the central bank policy actions.

Meanwhile, the FTSE 100 trading down 0.22 percent at 6,706 by 10:40 GMT.