UK jobs data, BoE division over guidance lift pound, hit gilts
* Sterling rises after BoE minutes, UK jobs data
* Shares drop, gilts pare gains
* Swaps market brings forward probability of 2015 rate hike
By Anirban Nag
LONDON, Aug 14 (Reuters) - Investors brought forward on Wednesday expectations of when UK interest rates would rise after data showed the job market improving and a surprise division among Bank of England policymakers over its guidance.
Sterling rose broadly, shares extended losses and UK government bonds lost ground as investors priced in a greater chance of a rate hike in two years time..
That would be one year earlier than suggested last week by BoE Governor Mark Carney in his first forward guidance on monetary policy. He said rates would stay low until unemployment fell to 7 percent - something he said was likely to take three years.
The latest data showed the unemployment rate held steady at 7.8 percent in June but a sharp fall in jobless benefit claims in July pointed to a brighter outlook.
However, markets were surprised by a division among Monetary Policy Committee members on the adoption of the guidance plan. Policymaker Martin Weale's dissension is likely to reinforce doubts the BoE can keep rates low for three years, especially if economic data keeps improving.
"The tone seemed to be hawkish with Weale dissenting so that should be bullish for sterling," Saeed Amen, currency strategist at Nomura, said. "We were expecting unanimous vote on the forward guidance."
Sterling rose to $1.5507 after the minutes and the jobs data from $1.5443 beforehand. The euro fell to 85.56 pence from 85.91 pence.
September gilt futures fell more than 40 ticks and were last 37 ticks down on the day at 109.72.
Short sterling futures <0#FSS:> fell across the strip while sterling overnight indexed swaps priced in a greater chance of a hike in the bank's base rate, from 0.5 percent, in two years . The two-year swap rose to 0.5475 percent from 0.52 percent beforehand.
The shift in expectations takes markets' view of the BoE rate outlook back to where it was in late June, just before Carney became governor on July 1. Soon after taking over, Carney dampened expectations of an early move by calling the rise in short-term money market rates "unwarranted."
However, given recent signs of robust recovery in the UK economy, many analysts have cast doubt on whether rates will remain anchored for three years. The forward guidance also included "knockout clauses" that would allow the bank to tighten policy if inflation was to rise faster than expected or if financial stability were threatened.
"The key thing is of course the minutes," said Brian Hilliard, economist at Societe Generale. "If the numbers improve the market will question the limits of the time horizon of forward guidance out to 2016." (Reporting by London Markets team, editing by Nigel Stephenson)
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