Bank of England holds fire, investors bet on earlier rate hike
By William Schomberg and Christina Fincher
LONDON (Reuters) - The Bank of England made no new attempt to talk down borrowing costs in financial markets on Thursday, prompting investors to pile on bets that it will raise interest rates sooner than it has suggested as growth picks up.
The BoE left monetary policy unchanged at its third monthly meeting under new governor Mark Carney and opted not to repeat its warning of July that investors were getting ahead of themselves by pushing up bond yields.
Yields on 10-year British government bonds broke through the 3 percent level for the first time in more than two years after the decision, pushed up also by strong U.S. economic data that reinforced expectations the Federal Reserve could start scaling back its stimulus program as soon as this month. <GB/>
Investors are now pricing in a first BoE rate rise in December 2014, as opposed to March 2015 before the policy statement, based on short-sterling contracts, Simon Peck, a rates strategist at RBS in London said.
Short-sterling contracts for December 2014 fell by 14 ticks and sterling hit a 7-1/2 month high against a trade-weighted basket of currencies on Thursday.
The BoE, under its forward guidance plan issued last month, expects to keep rates on hold until unemployment falls to 7 percent, something it expects only in late 2016.
Simon Hayes, an economist with Barclays, said investors overreacted to the BoE's decision to issue no statement which was not necessarily a sign that some policymakers agreed with the way markets were pricing in a first rate hike by the bank.
"I think they have got the wrong end of the stick," Hayes said, adding it was more likely the BoE did not see the rise so far in market rates as a threat to the economy. Continued...