UK gilts strengthen as BoE MPC meeting minutes open door for future rate cuts

The UK gilts strengthened Friday as the Bank of England in its monetary policy meeting decided to leave its official bank rate on hold at 0.25 percent and the programme of gilt purchases, financed via reserves issuance, was paused at 435 billion pounds.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 3-1/2 basis points to 0.859 percent, the super-long 40-year bond yield dipped 2 basis points to 1.449 percent and the yield on short-term 3-year bond slid 1-1/2 basis points to 0.147 percent by 09:10 GMT.

Bank of England's monetary policy committee left interest rates unchanged at 0.25 percent in a unanimous decision yesterday. They also voted 9-0 to keep the Bank's bond-buying programme target at 435 billion pounds and to continue with its new plan to buy up to 10 billion pounds worth of corporate bonds.

Importantly minutes showed that members acknowledged that the economy has fared slightly better than anticipated since the EU referendum. "A number of indicators of near-term economic activity have been somewhat stronger than expected," the Bank said in minutes of the MPC's September meeting.

The Committee now expects less of a slowing in UK GDP growth in the second half of 2016. Central bank staff estimated the economy would grow by 0.3 percent in the July-September period, better than their previous forecast of a slow crawl of just 0.1 percent made in August. Even at 0.3 percent UK Q3 GDP growth would be a half from the second quarter's pace and the BoE reiterated it could well cut its benchmark lending rate further soon.

Members expect that the uncertainty caused by the vote would drag on as UK negotiates its exit from EU. The MPC members noted that surveys since August had shown companies were probably cutting back on business investment, something which would weigh on the economy going forward.

On Thursday, the UK retail sales fell 0.2 percent m/m in August, better than the market consensus of 0.4 percent decline, from prior 1.4 percent in July (revised to 1.9 percent). On an annual basis, it climbed 6.2 percent y/y, against market expectations of 5.4 percent y/y, as compared to the previous 5.9 percent (revised to 6.3 percent).

This latest development, which clearly marks a slight correction from the very robust July sales performance should be interpreted as gilts negative and raises questions about how keen the BoE MPC will be to cut the Bank Rate again in November.

Meanwhile, the FTSE 100 traded 0.11 percent higher at 6,737.30 by 09:10 GMT.