UK gilts gain on BoE easing speculations, investors shrug off better than expected CPI data

The UK gilts gained Tuesday as investors speculate that the Bank of England will lower its interest rate in November’s monetary policy meeting. Also, markets largely shrugged off better-than-expected consumer inflation data for August.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 3 basis points to 1.094 percent, the super-long 30-year bond yield slid 2-1/2 basis points to 1.760 percent and the yield on short-term 3-year bond tumbled 1 basis point to 0.229 percent by 10:20 GMT.

According to a Bloomberg survey, more than 70 percent of economists are expecting the BoE to cut rates to 0.10 percent in November. This does not include us, as recent UK data have not provided justification for further easing -- although recent MPC comments have remained dovish.

The acceleration of UK CPI inflation to 1.0 percent y/y from 0.6 percent in August occurs on the back of a 0.2 percent m/m rise, and stands at it highest reading since November 2014. The m/m increase, driven higher by road fuel costs, clothing & footwear costs, hotel accommodation costs and gas prices, is actually consistent with the average m/m rise for a Sep month over the past 10 years.

The BoE MPC members however, already know that inflation will move above its 2 percent target before the end of the 2-year horizon but have categorically stated that they would overlook the prospective overshoot when setting policy in order not to hurt future growth and jobs. So, any appreciation in GBP from these latest figures will probably be fleeting.

According to Bloomberg, gilt yields have been climbing for the past three weeks as sterling’s 18 percent slide since the vote to leave the European Union drove a market gauge of inflation expectations to the highest in 2-1/2 years. Faster inflation erodes the fixed payments on bonds, while also making it less likely the Bank of England will be able to cut interest rates and extend its asset purchases.

Lastly, investors will remain keen to focus on the upcoming claimant count change, 10-year Treasury gilt auction and retail sales.

Meanwhile, the FTSE 100 traded 0.86 percent higher at 7,007 by 10:20 GMT.