PARIS (Reuters) – The British bond market continues to reposition itself in the face of persistent domestic inflation and a Bank of England (BoE) which insists on continued monetary tightening, pushing yields on short-term securities to record highs.

The rate on two-year British government bonds climbed more than eight basis points on Thursday, to 5.46%, its highest level since the 2008 financial crisis. This yield was around 3.5% at the start 2023.

In an interview with the BBC on Thursday, BoE Governor Andrew Bailey reiterated that the central bank must act immediately to reduce inflation or risk having to raise rates to higher levels.

UK inflation hit 11.1% in October 2022, its highest level in 41 years, and held steady at 8.7% in May, more than double US inflation and well above inflation in the euro zone.

The governor declined to speculate on when key rates might drop.

Money markets do not expect BoE rate cuts until March 2024, with the terminal rate expected to reach 6.5%, 150 bps higher than the current rate, according to the BoE Watch tool.

“The aggressive reassessment of the BoE’s rate hike forecasts continued, and the Gilts selling that started in mid-May continued in July,” summarizes MUFG, which however believes that yields are reacting too strongly to the rise.

The rise in British bond yields favors the appreciation of the pound, which gained 0.2% on Thursday to 1.2725 dollars. The currency has climbed more than 20% since its low point reached in late September, a rebound that exposes it to negative surprises, analysts said.

“Markets remain very sensitive to any developments on the price data side and the fairly aggressive expectations of a BoE tightening (140 basis points by January 2024) pose the risk of a recalibration of these expectations. and a fall in the pound”, comment the strategists of ING.

(Report Corentin Chapron, with William Schomberg in London, Muvija M, Abinaya Vijayaraghavan in Bangalore, edited by Blandine Hénault)

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