LONDON (Reuters) - Investors priced in an increased chance that British interest rates will not rise until next year, after the Bank of England said on Thursday that it wanted to make sure a slowdown in the economy was temporary before raising borrowing costs.
The BoE left interest rates on hold at 0.5 percent in its May policy meeting.
While this had been expected by the vast majority of economists polled by Reuters, financial markets picked up on a slightly cautious tone from the BoE that pushed sterling near to four-month lows against the dollar. [GBP/]
Most BoE rate-setters said they should wait for evidence that Britain’s economy was recovering from a weak start to the year before raising interest rates.
Five-year British government bond yields GB5YT=RR, sensitive to expectations for BoE rates, slid almost seven basis points after the decision to approach a three month low, and last stood at 1.13 percent, down four basis points on the day.
“(Policymakers) seem to have back-pedalled on their hawkishness from February. The market was priced for that anyway but the fact they seemed so uncertain about the data - they clearly have low levels of confidence about it,” Jason Simpson, fixed income strategist at Societe Generale said.
Overnight interest swaps now price in a chance of just over 10 percent that the BoE will not raise interest rates at all this year - with a rate hike delayed until early 2019 - compared with a near-certainty of a 2018 rate rise earlier. BOEWATCHMPCOIS=ICAP
They also point to a roughly 40 percent chance of a rate hike this August, which had been the consensus among economists polled by Reuters earlier this week. [BOE/INT]
A similar market measure, short sterling interest rate futures FSSZ8 priced in the lowest chance of a rate rise this year since January, after one of the biggest reductions in expectations this year.
BoE Governor Mark Carney told the BBC later on Thursday that he expected rates to rise this year, unless growth disappointed again.
As of 1500 GMT the 10-year gilt yield GB10YT=RR was down four basis points on the day at 1.42 percent.
Shortly before the BoE decision, HSBC chopped its year-end forecast for the 10-year gilt yield by 30 basis points to one percent, citing weaker-than anticipated economic growth.
“If the MPC is right (about the growth outlook), then it will likely plow on with the limited and gradual tightening it has repeatedly guided towards ... but we suspect it has missed its chance,” HSBC economists Elizabeth Martins and Chris Hare said after the BoE decision.
The premium that 10-year gilts offer over the equivalent German Bund GB10YT=RR narrowed by around 3 basis points after the BoE decision to 87 basis points.
June long gilt future FLGcv1 122.34 (+0.44)
Dec 2018 short sterling FSSZ8 99.12 (+0.04)
Mar 2019 short sterling FSSH9 99.04 (+0.04)
10-year gilt yield GB10YT=RR 1.43 (-3 bps)
Editing by William Maclean