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U.K. Bonds May Gain; BOE Minutes Show 7-2 Vote on Rate Increase
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By Gavin Finch
Nov. 22 (Bloomberg) -- U.K. government bonds may gain after the Bank of England said two policy makers voted against raising interest rates at this month's meeting.
The minutes of the BOE's meeting this month showed David Blanchflower and Rachel Lomax opposed raising rates a quarter point to 5 percent, against a majority of seven policy makers who favored the increase. Gilts have gained for the past two weeks on speculation the central bank will raise rates only once more.
``Inflation pressures aren't as bad as had previously been supposed and the BOE could have scope for relaxing its vigilance,'' said Steven Major, head of fixed-income strategy at HSBC Holdings Plc in London. ``Short-dated gilts look very good value.''
The yield on the two-year benchmark gilt, among the securities most sensitive to interest-rate expectations, was little changed at 5.02 percent at 11:22 a.m. in London. The price of the 5 percent security due March 2008 was at 99.97. Bond yields move inversely to prices.
Lomax argued a rate increase was less pressing now and Blanchflower said there were downside risks to demand and inflation, according to the minutes of the BOE's Nov 8-9 meeting.
The BOE said Nov. 9 in a statement it expects inflation to ``rise further above the target in the near term, but then fall back as energy and import price inflation abate.''
Manufacturing Rebound
Gains for gilts may be limited after a report yesterday which showed factory orders rebounded from a nine-month low in November as a gauge of export demand rose to the highest in 11 years.
A measure of new orders, based on a survey of manufacturers, rose to minus 6 from minus 20 in October, the Confederation of British Industry, the U.K.'s biggest business lobby, said yesterday. The index of export orders rose to 3, the highest since August 1995, from minus 11.
Lehman Brothers Holdings Inc. last week raised its forecast for U.K. lending rates, predicting the BOE will lift its main rate a quarter-point to 5.25 percent in February, before cutting the rate to 5 percent in February 2008. The bank had previously forecast a cut in the rate to 4.75 percent in August 2007.
Investors still expect one more rate rise from Bank of England next year. The implied yield on the March 2007 contract was at 5.34 percent today. The contracts settle to the three- month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the benchmark rate for the past decade.