UK jobs data, BoE division over guidance lift pound, hurt gilts
(Adds fresh quote, details)
* Sterling rises after BoE minutes, UK jobs data
* Shares drop, 10-yr gilt yield at two-yr high
* Money markets bring forward probability of 2015 rate hike
By Anirban Nag
LONDON, Aug 14 (Reuters) - Investors brought forward expectations of when UK interest rates would rise after data on Wednesday showed the job market improving and a surprise division among Bank of England policymakers over its guidance.
Sterling rose broadly, shares briefly fell and UK government bonds lost ground as investors priced in a greater chance of a rate hike in 2015. time..
That would be a 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 shift in expectations takes markets' view of the BoE rate outlook back to where it was in late June, just before Carney became governor. Soon after taking over on July 1, Carney dampened expectations of an early move by calling a rise in short-term money market rates "unwarranted."
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, an unexpected division among Monetary Policy Committee members on the adoption of the guidance plan surprised markets. External member 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 $1.5540 from $1.5443 before the minutes and the jobs report was released. Against the euro, it traded firmer near a one-month high at 85.43 pence per euro.
The 10-year gilt yield rose to 2.648 percent, its highest in two years, according to Reuters data.
Short sterling futures <0#FSS:> fell across the strip while sterling overnight interbank average (SONIA)rates priced in a greater chance of a hike in the bank's base rate, from 0.5 percent, in two years. Two-year SONIA rose to 0.5475 percent from 0.52 percent beforehand..
"Front-end rates have moved up and so has sterling, but I would be cautious about the pound moving much higher from here as Carney has previously flagged that tighter conditions are unwarranted," said Sara Yates, currency strategist at JPMorgan Private Bank. "The downside in sterling, though, will be checked by good economic data in the UK."
After recent signs of robust recovery in the 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.
UK consumer prices rose 2.8 percent year on year in July, well above the BoE's inflation target of close to, but not below, 2 percent.
"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." (Additional reporting by London markets team, editing by Nigel Stephenson)
- Obama and Castro shake hands, Zuma humiliated at Mandela memorial |
- Google bus blocked in San Francisco gentrification protest
- Reporter can keep sources secret in Colorado theater shooting: court
- Couple, four children missing in Nevada found safe in canyon
- Regulators seek to curb Wall St. trades with Volcker rule |