`Cautious’ BOE Makes Gilt Slide a Buy for Macquarie Investment

LONDON (Capital Markets in Africa) – The market’s pricing of two interest-rate hikes in coming months by the Bank of England is “a bit overdone” for Macquarie Investment Management and so it sees the recent fall in gilts as a buying opportunity.

Markets are pricing in an 85 percent chance of a 25-basis-point rate increase for the next BOE meeting on Nov. 2, more than double the probability in early August after growing inflationary pressures in the U.K. and hawkish rhetoric from policy makers. But with Brexit posing a “big uncertainty” for the BOE, Shaughn Wilkie, a fixed-income portfolio manager at Macquarie, remains sceptical on the pace of tightening.

The BOE will “remain cautious,” said Wilkie, whose firm manages over 165 billion dollars in fixed-income assets globally. “The BOE is likely to take out this emergency cut from the referendum, get back to being on hold. Yields have backed up and under this outcome become a buying opportunity.”

The yield on 10-year U.K. government bonds rose two basis points to 1.35 percent on Tuesday, after data showed annual inflation in September climbed to the highest rate in more than five years. At 3 percent it’s a full percentage point above the BOE’s target, yet this bout of inflation is likely to dissipate unless there are further significant falls in sterling, Wilkie said.

With the U.K. at the bottom of the Group of Seven growth rankings, doubts remain on future BOE policy. While most economists predict a hike in November, the next increase might not come until the first quarter of 2019, according to a Bloomberg survey.

Source: Bloomberg Business News