Gilt yields fall as markets push back rate hike bets on BoE

LONDON: British gilt yields fell on Thursday after the Bank of England indicated it was in no hurry to raise interest rates, prompting markets to push out bets on the timing of the first rate hike in eight years.

Yields on two-year bonds, particularly sensitive to changes in interest rate expectations, fell from their highest level in more than a year early in the session to end up 3 basis points lower on the day at 0.69 percent.

Five year yields were 2 basis points lower at 1.34 percent and ten-year yields were also 2 basis points lower at 1.98 percent.

Short sterling futures, which are used as a gauge of interest rate expectations, rose as much as 9-10 ticks across late 2016 and 2017 contracts having been broadly flat before the rate verdict. They last stood up around 4 ticks on the day.

"There is less commitment to September and more commitment to December next year, so it's all very dovish," Marc Ostwald, a strategist at ADM Investor Services International said of the market reaction.

In a new set of economic forecasts, the BoE predicted Britain's near-zero inflation would pick up only slowly and that growth would be lower than previously expected due to risks from the global economy.

Some in the market had expected the BoE would signal a more pressing need for a rate hike, after recent data pointed to a solid start to the fourth quarter and after Federal Reserve Chief Janet Yellen signalled U.S. rates could rise in December.

The BoE is expected to only raise borrowing costs after the Fed does, to try to gauge the impact of a U.S. rate rise on emerging markets and on the exchange rate.

The Monetary Policy Committee voted 8-1 to hold rates at a record low of 0.5 percent, as forecast in a Reuters poll. But some in the market had expected BoE policymakers Martin Weale or Kristin Forbes might join Ian McCafferty in voting for a rate rise this time around.

"The market reaction was on the dovish side and unsurprisingly so," said Vatsala Datta, UK rate strategist at RBC. "The timing of the first rate hike has been pushed out to November 2016 now from August 2016 before the inflation report."

She highlighted the message on the downside risks to inflation and the greater importance the BoE had given to risks from external weakness.