UK gilts gain ahead of BoE’s policy decision

The UK gilts strengthened on Wednesday as investors remained cautious ahead of the Bank of England’s (BoE) monetary policy meeting. We look for the MPC to lower the official bank rate by 25 basis points and probably implement additional quantitative easing.

The yield on the benchmark 10-year gilts fell 1 basis point to 0.799 percent, the yield on super-long 40-year bond also dipped 1 basis point to 1.481 percent by 10:00 GMT.

The Bank of England is expected to ease interest rates by 25 basis points to 0.25 percent (market is pricing 98 percent probability for a rate cut) 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.

 In terms of recent economic data release, the Markit/CIPS service PMI data that came in on expectations at 47.4, though sharply down from the 52.3 reading seen in June.

Meanwhile, the FTSE 100 traded 0.29 percent lower at 6,622.70 by 10:00 GMT.