Brits not budging on rates

The pound weakened(CME:BPH5) versus the dollar after minutes of the Bank of England’s December meeting showed policy makers voted 7-2 to keep interest rates at a record low.

Sterling appreciated against the euro after a separate report showed unemployment held at the lowest since 2008. U.K. government bonds climbed, adding to advances yesterday that pushed 30-year yields below 2.5 percent for the first time, as the lowest inflation rate in more than a decade boosted demand for the fixed payments made by gilts.

“There is some disappointment that the vote is not pushing close to the threshold for higher rates,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. “The market expectation is for rates to rise next year. We should be closer on the split, a 6-3 or a 5-4 should be in play by now, but we are still stuck at 7-2.”

The pound dropped 0.3 percent to $1.5705 at 2:26 p.m. London time after climbing 0.7 percent yesterday, the biggest advance since Oct. 15. The U.K. currency strengthened 0.1 percent to 79.36 pence per euro.

Sterling has gained 6.7 percent in the past year, the best performer after the dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The greenback surged 11 percent, while the euro fell 0.9 percent.

U.K. gilts have been supported as the global inflation outlook crumbles and commodity prices plunge, leading traders to pare back wagers on higher borrowing costs. A measure of Britain’s inflation outlook dropped to the lowest in more than two years yesterday, as the price of Brent crude oil dropped below $60 a barrel for the first time since July 2009.

Inflation Slows

The annual rate of consumer-price growth declined to 1 percent last month, the least since 2002, from 1.3 percent in October, the Office for National Statistics said yesterday. U.K. inflation in coming months “is going to be low,” BOE deputy governor Jon Cunliffe said in a BBC Radio interview today.

Unemployment in Britain held at 6 percent in the three months through October, the lowest since 2008, the ONS said today. The median estimate in a Bloomberg News survey was for a reading of 5.9 percent. Wages grew 1.4 percent from a year earlier, up from 1 percent in the third quarter.

Bank of England officials said a “promising” pickup in wage growth wasn’t enough to raise concerns about the outlook for medium-term inflation, according to minutes of its Dec. 3-4 meeting. The Monetary Policy Committee said “by far” the most significant developments in the month were the continued drop in oil prices and a reduction in market interest rates.

The BOE’s official rate has been at a record-low 0.5 percent since March 2009. Two of the MPC’s nine members also voted for a quarter-point rate increase in November.

Rate Outlook

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors aren’t expecting a 25 basis- point increase in the rate before the end of November next year. About four months ago, the market was priced for an increase in February 2015.

Benchmark 10-year gilt yields slipped 3 basis points, or 0.03 percentage point, to 1.75 percent after touching 1.69 percent yesterday, the lowest level since May 3, 2013. The 2.75 percent bond due in September 2024 rose 0.27, or 2.70 pounds per 1,000-pound face amount, to 108.935.

The rate on 30-year gilts fell one basis point to 2.50 percent after dropping to 2.439 percent yesterday, the least since Bloomberg started collecting the data in 1996.

The 10-year break-even rate, a measure of the outlook for retail-price inflation derived from the difference in yield between gilts and inflation-linked securities, was little changed at 2.54 percent. It dropped to 2.49 percent yesterday, the lowest since November 2012.

Gilts returned 15 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 10 percent and U.S. Treasuries 6.7 percent.

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