(Updates prices, adds fresh comments)
By Anirban Nag and Tricia Wright
LONDON, June 13 Investors braced on Friday for a
UK interest rate hike later this year, pushing sterling to
five-year highs and hurting property stocks, after the head of
the Bank of England said rates may 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 by nearly four months, to December 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. Short-dated UK
government bond yields were on track for their biggest daily
gain in more than three years.
A rate hike by the end of 2014 is likely to come at least
six months before the U.S. Federal Reserve tightens policy. It
would contrast sharply with the European Central Bank, which cut
rates last week and is likely to ease policy in the coming
"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."
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.
Carney also said he was 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 in which living standards
and the cost of housing are expected to be major issues.
The comments from Carney, who until recently was of the view
that rates would be kept lower for longer to ensure a
broad-based recovery, sent London's main share index
down 1 percent, with housebuilders Persimmon and Barratt
Developments both losing between 6-7 percent.
Sterling hit a fresh 5 1/2-year high in a trade-weighted
basket of currencies, rising to 88.2. 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 79.765 pence, its lowest since
November 2012. The euro has shed nearly 2 percent since the ECB
cut 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.
STOCKS HIT, YIELDS RISE
Analysts were relatively sanguine on housebuilding stocks,
saying Friday's falls should be seen in the context of strong
gains in the share prices. 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 falling 2.8
In the gilts market, shorter-dated British government bond
prices plummeted, with the two-year gilt yield on
course for its biggest daily gain in more than three years,
according to Reuters data.
It was last up some 15 basis points at 0.888 percent, having
hit a high of 0.903 percent - its highest since mid-2011.
"These comments should help prompt a sustained move towards
higher front-end yields," said Jamie Searle, strategist at Citi.
(Additional reporting by Andy Bruce, Editing by Larry King)