U.K. Gilts Gain in Week on Views BOE Interest Rate Has Peaked

November 14, 2004
U.K. gilts logged their biggest weekly gain in more than three months on speculation the Bank of England will refrain from increasing its benchmark interest rate any further, raising the appeal of debt's fixed returns.

The Bank of England, led by Governor Mervyn King, said in its quarterly inflation report Nov. 10 the ``risks to growth and inflation are somewhat on the downside.'' This compares to risks that were ``broadly balanced'' in their previous report in August. The bank has raised its main interest rate five times in the past year, to 4.75 percent, to curb inflation.

``King's comments were fairly dovish, and we're not expecting a further rate rise, so 4.75 percent is the top,'' said Ian Faulkner, a bond salesman at Sutherlands Ltd. in London. ``Those who feel there would be one more rate hike would perhaps now be considering moves to no change, and that has helped the bond market.''

British house prices fell an unadjusted 0.1 percent in September, the first drop since February, after gaining 1.2 percent the previous month, the Office of Deputy Prime Minister John Prescott said Nov. 8. HBOS Plc, the U.K.'s biggest mortgage lender, said on Nov. 1 that property prices fell in October.

`House prices have on average stopped rising -- they have been broadly flat over the past two months -- and a slowdown in the housing market is evident in virtually all the indicators,'' said King on Nov. 10 at a press conference, following the publication of the quarterly inflation report.

Futures Slide

Interest-rate futures show traders have lowered expectations for rate increases next year. The yield on the March contract shed 15 basis points this week, to 4.89 percent, according to data compiled by Bloomberg.

The contract settles to the three-month U.K. London interbank offered rate, or Libor, which since 1987 has averaged about 0.14 percentage point above the central bank's key interest rate.


The U.K. economy grew 3 percent in the third quarter, slowing from 3.6 percent in the previous three months, the National Statistics Office in London said on Oct. 22.