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The UK gilts continued to rally on Thursday due to rising speculation that the Bank of England may restart quantitative easing at next week's meeting or opt for lower interest rates.
The yield on the benchmark 10-year gilts fell more than 3 basis points to a record low of 0.707 percent, the yield on super-long 30-year bond dipped nearly 2 basis points to 1.593 percent and the yield on short-term 2-year bonds slid 1/2 basis point to 0.125 percent by 10:10 GMT.
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 shock to the financial markets, which made investors to 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.
Interestingly, the Bank of England’s MPC member Martin Weale said that policy action in August unlikely to boost the economy before next year and monetary policy would not boost economy straight away so any action would not save the UK from recession if growth is beginning to shrink.
He further added that weaker PMI detail will be very material for next week's rate decision as it was a lot worse than expected.
Martin Weale has indicated that he has changed his mind and now favors an immediate stimulus for the economy after reading weak PMI numbers, FT reports, citing an interview.
Moreover, the Markit PMI survey showed that the economy was shrinking at the fastest rate since 2009. The preliminary UK July manufacturing PMI tumbled to 49.1, against market consensus of 50.0, as compared to 52.1 in June. Similarly, the service PMI reading also dipped to 47.4, against market expectations of 49.2, from 52.3 in June.
Furthermore, the gilts have been closely following developments in oil markets because of their impact on inflation expectations. The crude oil prices hit its lowest since May following sluggish global demand and supply glut concerns.
Also, the EIA in its latest report mentioned that the US crude inventories climbed to a seasonally adjusted annual rate of 1.671 million barrels, consensus was for a fall of -2.257 million barrels, as compared to -2.342 million barrels in the preceding month. The International benchmark Brent futures fell 0.64 percent to $43.59 and West Texas Intermediate (WTI) tumbled 0.19 percent to $41.84 by 09:40 GMT.
Meanwhile, the FTSE 100 trading down 0.29 percent at 6,731 by 10:10 GMT.
