LONDON: Bank of England minutes pushed back expectations of when UK interest rates will start to rise on Wednesday, driving the gap between swap curves mapping the anticipated ECB and BoE rate hike paths to a euro-lifetime high.
The minutes from the BoE's latest policy meeting led markets to all but rule out a hike in May.
The sterling overnight interest rate curve (Sonia) implied a 25 basis point rate rise was now fully priced in by the bank's Nov. 10 meeting, compared to levels before the release of minutes which showed a first hike in October.
Details of the April meeting showed the bank's Monetary Policy Committee came no closer to increasing interest rates this month than previously as concerns about the strength of the economy outweighed inflation risks.
Short sterling contracts rallied across the 2011 strip but the scale of the move was small and the scope for further rallies was limited after below-forecast inflation data last week had already squeezed rate hike expectations.
"On the back of a neutral to slightly more dovish document you can't really expect the strip to rally much from here... The room for a further rally at the front end was already limited after the recent squeeze," said BNP Paribas rate strategist Matteo Regesta.
Overnight rates implied a roughly 13 percent chance that the bank would raise rates in May compared to around a 47 percent chance seen as recently as April 7.
Despite the market's low expectations in the very near term, analysts said there remained some room for expectations to fall further out along the curve -- with around a 57 percent chance of a rate hike at August's BoE meeting.
"I can see the August expectations going the same way as those for May over time. I simply don't see any growth traction in the domestic economy just yet," said Eric Wand, rate strategist at Lloyds Bank in London.
However, the sharp repricing over the last two weeks meant that the possibility of mild rebound in May expectations had increased, with next week's GDP figures seen as a likely trigger if they showed stronger than expected growth, analysts said.
EURO ZONE RATES
The differing policy outlook between the Bank of England and the European Central Bank -- which began raising interest rates this month -- was illustrated by the steepening of the UK bond yield curve relative to the euro zone benchmark Bund curve.
The difference between the steepness of the two equivalent swap curves -- which market players trade by placing a flattening position on one versus a steepening position on the other -- hit its highest since the launch of the euro at 95 bps.
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