Financial Times - Gilts and shares fall after BoE splits over policy and outlook
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June 15, 2017. Roger Blitz, Kate Allen.
Uncertainty over Brexit also pushes domestic-focused FTSE 250 lower.
UK bond and share prices slumped on Thursday after the Bank of England signalled a more challenging economic outlook and its rate-setters split over the outlook for inflation.
The surprise split from the BoE’s policymakers over whether to raise rates leaves investors in UK stocks, bonds and the pound with a testing backdrop to navigate. Alongside rising inflation, the UK faces an economy showing signs of weakness and acute political uncertainty while attempting to map its exit from the EU.
Members of the Monetary Policy Committee voted by five to three to keep interest rates on hold at a historic low of 0.25 per cent, but the call was closer than markets had expected.
The policy sensitive two-year gilt yield jumped from 0.126 per cent to 0.177 per cent, its highest level since March. The 10-year yield — a barometer of inflation expectations — rose from 0.95 per cent to 1.02 per cent. Yields rise when bond prices fall.
The pound, which had been under pressure from an array of poor data, was supported by rising gilt yields. The currency jumped one cent to trade at just below $1.28, while the euro fell 0.8 per cent to 87.20p.
“The 5-3 vote today is clearly one that markets were not positioned for and sterling’s reaction reflects this,’’ said Geoffrey Yu, head of the UK investment office at UBS Wealth Management.
James Knightley, a senior economist at ING, said the MPC’s decision was “the biggest vote in favour of a hike since 2007”. But he forecast that it was unlikely that the central bank would raise rates anytime soon. “The economic and political uncertainty . . . is too great to get a consensus behind higher rates,” he added.
Equities were already under pressure before the BoE statement after retail sales figures revealed a weaker consumer spending outlook, heightening concerns about the implications of the negative economic outlook for corporate earnings. The FTSE 250 was on course for its worst day so far this year, down more than 2 per cent at lunchtime.
The FTSE 250 is more exposed to a domestic economic slowdown than the blue-chip FTSE 100, which is dominated by multinational companies that generate more of their revenues overseas.
Retail sales data released on Thursday was the latest downbeat indicator. After rising 2.2 per cent in April — an increase influenced by the timing of Easter — retail sales fell 1.6 per cent in May by more than expected.
The data follows the release on Monday of stronger than expected inflation and on Tuesday of wage data, which showed a fall in weekly earnings growth.
Analysts had expected further market volatility on Thursday as Philip Hammond was scheduled to deliver his annual Mansion House speech. But this afternoon the chancellor announced he was pulling out the engagement out of respect for the victims in Grenfell Tower fire tragedy in London.
The fluid political situation in Westminster leaves the pound vulnerable ahead of the scheduled start of talks with the EU next week.
The pound has been turbulent since last week’s election delivered a hung parliament, sliding from close to $1.30 before the vote to $1.2632 on Friday, before rallying on hopes that the election outcome had made a soft Brexit more likely.
Irrespective of the BoE’s views on the economy, “sterling remains at the mercy of future Brexit negotiations [which] are likely to be postponed due to the difficulties of forming a government”, said Commerzbank strategist Ulrich Leuchtmann. “The BoE’s job is definitely not going to get any easier in the foreseeable future.”
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