UK gilts, rate futures edge higher ahead of BoE

Wed, Sep 3 2008, 16:17 GMT
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LONDON Sept 3 (Reuters) - Falling oil prices helped support British government bonds on Wednesday as inflation fears eased and investors grew more confident that the Bank of England could cut interest rates before the end of the year.

The BoE is widely expected to keep rates on hold at 5 percent at 1100 GMT on Thursday given the fact that inflation is running at more than twice the central bank's two percent target and is expected to spike higher in the coming months.

But rate cuts are expected, as soon as the inflation threat has passed, to help stave off a deep recession. Fears of a global slowdown pushed oil prices below $109 a barrel on Wednesday. Oil has tumbled more than $6 since Friday.

The UK services sector survey rounded off a gloomy overview of the British economy from the closely-watched PMIs, showing a further contraction in the sector that makes up about three-quarters of the economy in August.

That followed reports showing manufacturing and construction activity declining again. There were glimmers of hope in the surveys but economists still expect conditions to remain difficult and the economy to slip into recession.

"Although this offers little reassurance that the UK is safe from the risk of a sharper and more protracted period of negative growth, it does buy the Monetary Policy Committee more time to assess the severity of the slowdown before moving rates," said Allan Monks, an economist at JP Morgan. "A surprise move tomorrow looks unlikely."

At 1536 GMT, short sterling futures <0#FSS:> were one to four ticks higher across the strip. The December gilt future <FLGZ8> settled 5 ticks higher at 111.76. Yields on 10-year gilts were 1 basis point lower at 4.49 percent.

Falling equity markets also lent some support to the debt market, with Britain's FTSE 100 index of leading shares <.FTSE> down about 2 percent.

One gilts traders said persistent volatility across asset classes was making people reluctant to put on big positions.

"Trade is quiet and dominated by the derivatives market, not cash," he said. "As soon as some one puts on a position, they hedge it in the futures market. No one wants to be exposed to risk."

tf.TFN-Europe_newsdesk@thomson.com

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