UK gilt yields to remain at current levels, to move higher in 6-12M - Danske Bank

According to analysts from Danske Bank, the Bank of England will remain on hold regarding rates until the end of Brexit negotiations, expected around April 2019. They see UK gilt yields to remain at current levels before moving to the upside. 

Key Quotes: 

“As expected, the Bank of England maintained the Bank Rate at 0.25% and kept its targets for government bond purchases and corporate bond purchases at GBP435bn and GBP10bn, respectively, at the Monetary Policy Meeting on 3 August. We interpret that the BoE moved in a more dovish direction at the August meeting as the vote count for the Bank Rate was 6-2 against 5-3 the previous time. Hence, only two members voted for a rate hike. Furthermore, we still view the core of the Monetary Policy Committee (including Governor Mark Carney) as being tilted to the dovish side.”

“That said, since the unemployment rate has declined to NAIRU and inflation is above target, it may not take much for the BoE to become more hawkish. Higher wage growth (and thus higher underlying inflation) could be one trigger. That said, we still expect the BoE to remain on hold until the Brexit negotiations are concluded in spring 2019. The main reasons are that we think the BoE is still too optimistic on both wage growth and GDP growth and political uncertainty remains high due to Brexit.”

“We expect UK gilt yields to remain close to current levels for now, before eventually moving higher in 6-12M, driven by higher yields in the US and Europe. We expect the 2Y10Y and 5Y10Y yield curves to steepen, as we expect the short end of the curve to stay low and the long end to be pushed higher by US and EUR 10Y yields.”