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Bring on the stimulus.

Britain’s 10-year government bond yields have hit an all-time low this morning, a week ahead of a widely expected interest rate cut from the Bank of England, writes Mehreen Khan.

The benchmark gilt yield, which moves inversely to prices, has fallen to 0.7053 per cent this morning shedding 3 basis points (0.03 percentage points) and breaching the previous lows it plumbed ahead of the UK’s EU membership referendum.

Gilts were on a turbo-charged rally last month on the back of expectations the BoE would have to unleash more monetary stimulus to counteract the effects of Brexit. A month on and those fears have been realised, with investors now fully pricing in a 25 basis point cut in interest rates when policymakers meet for their August decision next Thursday (see chart below).

The BoE will also be releasing its latest quarterly outlook on growth and inflation – its first set of forecasts after the referendum. A rate cut would be its first since the depths of the financial crisis.

Ahead of the decision, household inflation expectations have also hit their highest level in nearly two years, reaching 1.8 per cent in July, according to a poll carried out by YouGov for Citi.

However, longer term consumer inflation expectations over 5-10 years hit their lowest level since November 2005 at just 2.4 per cent this month. The survey of over 2,000 people was carried out on July 20-21.

“We expect the Bank of England to look through the likely short-term inflation spike and focus on declining long-term inflation expectations”, said Christian Schulz at Citi.

The bond rally has extended across the safest sovereign debt this morning. German 10-year bund yields have fallen 1.3 basis points to -0.091 per cent this morning with the equivalent maturity US Treasuries yields slipping slightly to 1.5 per cent.

Copyright The Financial Times Limited 2017. All rights reserved.
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