UK gilts counting down to MPC minutes

21 Jun, 2004

UK gilt investors will set their spotlight on the release of the Bank of England's June meeting minutes on Wednesday, keen for clues to the future pace of rate hikes after June's quarter point rise.
The minutes are expected to show the monetary policy committee (MPC) in a hawkish mood, given a run of strong data in the run up to the meeting and the subsequent decision to raise rates for the second time in two months.
Analysts said gilts have already priced in a fair amount of the risk posed by signs of rising inflation, but added that the short end of the curve could still suffer setbacks if the MPC shows signs of strengthening its hawkish tone.
Short-term yields as well as benchmark 10-year yields are little changed since the last rate rise on June 10. But BoE Governor Mervyn King's warning this week on the housing market has fuelled expectations that rates are definitely headed up.
Economists said the extent to which arguments against the raising of the key repo rate to 4.5 percent were discussed would offer vital clues to the direction the MPC is likely to follow in future months.
"There will certainly have been some discussion of the need to hold off and it will be important to see how much weight these arguments were given," Lehman Brothers economist Alan Castle said.
The minutes to May's meeting shocked markets when they revealed the MPC had considered a 50 basis point hike before scaling back its move to 25 basis points, but economists said such a sharp move was probably not discussed seriously in June.
The margin by which June's rate decision was passed will give another indication of when future hikes can be expected.
"A couple of dissenting voices in June would probably be sufficient to persuade the markets that the next rise in rates will not come before August, but another unanimous vote could fuel speculation about a third successive hike in July," Royal Bank of Scotland analysts said in a note.
A Reuters poll of economists forecasts that the motion to raise rates was passed unanimously.
Economists said they would also be looking out for any reiteration of King's comments this week about a possible fall in house prices and for any discussion of recent discrepancies between manufacturing surveys and official data.
The Confederation of British Industry's industrial trends survey, released on Thursday, is the only other UK release that might hit the gilts market in the coming week.
Gilts strategists said that the market has already priced in much of the risk of a hardening of the MPC's hawkish line, but said the short end of the curve was still vulnerable to some impact from the minutes.
"The MPC could decide to step up their rhetoric and get us worried that they could raise rates again in July," Kit Juckes, chief strategist at the Royal Bank of Scotland said.
"There's already a fair bit of that risk priced in, but the front end of the curve is more at risk than the rest," he added.
Alternatively if the minutes show that there was resistance to the hike from some members, short-dated paper could receive a boost, strategists said.

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