(Updates prices, adds fresh comments)
By Anirban Nag and Tricia Wright
LONDON, June 13 Investors priced in a rise in UK
interest rates as soon as year-end on Friday, sending sterling
to five-year highs and hitting property stocks, after the Bank
of England chief said rates could rise sooner than markets
Governor Mark Carney's surprisingly stark warning late on
Thursday prompted investors to bring forward expectations for a
first BoE rate hike to before the end of this year, from the
first quarter of 2015.
Sterling's trade-weighted index posted its biggest one-day
rise in four months, hitting 5 1/2-year highs.
A possible rate hike by the BoE by the end of 2014 would
make it the first major central bank to normalise monetary
policy since the global financial crisis broke out in 2008.
A hike is likely to come at least six months before the U.S.
Federal Reserve is seen tightening policy and contrasts sharply
with the European Central Bank, which cut rates last week and is
likely to ease policy in the coming months.
Carney said he was also concerned by signs that mortgage
lending standards were becoming looser and set out the case for
early action as insurance against future risks.
While Britain's economy is outperforming its peers, growing
at a near 3 percent annual rate, house prices are up 11 percent
over the past year, pressuring policymakers to prevent a bubble.
Britain faces an election in May 2015 at which living
standards and the cost of housing are expected to be major
London's main share index was down 0.5 percent by
0845 GMT, with housebuilders Persimmon and Barratt
Developments both losing more than 4 percent.
Short sterling futures fell across the strip <0#FSS:>,
pricing in a first hike by December. The sterling overnight
interbank average curve (SONIA) was pointing to a
chance of a rate hike by the end of the year, compared with the
first quarter of 2015 on Thursday.
"The BoE seems to be slightly ahead of the Fed as far as
rate hikes are concerned," said Lutz Karpowitz, currency analyst
at Commerzbank. "Macro data is likely to attract particular
attention over the coming months. Anything pointing towards a
possible rate hike would then support the pound further."
Sterling hit a fresh 5-1/2 year high on a trade-weighted
basket of currencies, rising to 88.1. Britain's recovery
has pushed the index 8 percent higher over the past year as
investors priced in growing chances of rate hikes by the BoE.
The euro fell to 79.85 pence, down 0.2 percent
on the day, and its lowest since November 2012. The euro has
shed 1.8 percent since the ECB cut interest rates last Thursday.
The diverging UK and European policy outlooks have pushed
the difference in yields between British and German
10-year government bonds to its widest since 1997.
The pound hit $1.6995, its highest since reaching
$1.6997 on May 6. Above $1.6997, sterling will be at its highest
since August 2009, with bulls now targeting the $1.70 mark.
"The pound has maintained its close relationship to the
changes in market rate expectations as expressed by the front
end of the money market curve. Hence, we would expect the pound
to push higher and we maintain our forecast of $1.75," Morgan
Stanley said in a morning note.
Analysts were relatively sanguine on housebuilding stocks,
saying Friday's falls should be seen in the context of strong
share price runs. While higher rates would raise the costs of
borrowing to build, it would also signal the economy - and
consequently funding prospects - were looking brighter.
"Markets are obviously now anticipating that interest rates
will rise - it'll just take some of the froth off the strength
that we've seen (from housebuilders)," said Richard Hunter, head
of equities at Hargreaves Lansdown.
The pain was felt throughout the property sector, with Land
Securities and British Land both left nursing
falls of 2.8 percent.
(Additional reporting by Patrick Graham; Editing by Nigel
Stephenson and Catherine Evans)