UK sovereign bonds rallied sharply and market pricing for a Bank of England rate cut this year swelled after Mark Carney acknowledged that mounting global uncertainty might prompt policy action from central banks in “some jurisdictions.”
The 10-year Gilt yield dropped almost 9 basis points (0.09 percentage points) on Tuesday afternoon to 0.724 per cent, according to Refinitiv data. Yields fall when prices rise.
Mark Carney, the BoE chief, said in a speech that “a global trade war and a no deal Brexit remain growing possibilities not certainties.”
“Monetary policy must address the consequences of such uncertainty for the behaviour of businesses, households and financial markets,” he said. “In some jurisdictions, the impact may warrant a near term policy response as insurance to maintain the expansion.”
The 10-year yield is now below the BoE’s policy rate of 0.75 per cent. It has not closed below the bank rate since the crisis of 2008, according to FactSet data.
Meanwhile, market expectations for a BoE rate cut this year jumped on Tuesday to 49.6 per cent, from 25.6 per cent on Monday, according to Bloomberg calculations based on overnight indexed swaps.
These market expectations contrast with the guidance provided by BoE policymakers. Last month, the central bank stuck to its guidance that interest rate increases would be required “at a gradual pace and to a limited extent”.
Mr Carney noted that while the BoE’s monetary policy committee would “do what it could to support the economy” in the event of crashing out of the EU without a deal, “I would underscore the MPC’s caution that the response of monetary policy to Brexit will not be automatic.”
His comments come hours after Moody’s, the rating agency, warned that a no deal Brexit would “likely” lead to a recession in the UK, as well as fresh ructions in the currency market.
Boris Johnson and Jeremy Hunt, the two candidates vying to replace Theresa May as prime minister, have both said they are prepared for the UK to exit the EU without a deal — heightening market expectations of a potentially chaotic Brexit.
