Reuters: US Dollar Report: MONEY MARKETS-UK money markets pricing out further easing

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MONEY MARKETS-UK money markets pricing out further easing Oct 26th 2012, 11:43 By Kirsten Donovan LONDON | Fri Oct 26, 2012 7:43am EDT LONDON Oct 26 (Reuters) - British money markets have further pared back expectations of Bank of England rate cuts after data this week showed a surprisingly large rebound in the UK economy. Olympic spending fuelled Britain's strongest quarterly growth in five years with the pace beating expectations and potentially preventing an overall contraction in the economy this year. Forward overnight Sonia (sterling overnight interbank average) rates - the very short-term interest rates which form the basis of lending costs to the wider economy - now show an implied overnight rate in April of 0.36 percent, up from around 0.3 percent two weeks ago, according to Commerzbank, and compared with a current 0.43 percent. UK interest rates are currently at 0.5 percent. "(A rate cut) looks very unlikely, because the macroeconomic impact is probably small and also perhaps because we're moving towards a less aggressive easing bias," said RBS rate strategist Simon Peck. The shape of the forward overnight rate curve reflects how much a further rate cut has been priced out of the market. In late August the implied rate in three months' time was around 5 basis points lower than in two months. That same forward rate gap has now narrowed to just a basis point - a much flatter curve structure. RBS has exited its trade betting that rates - reflected by Gilt yields which have fallen as the BoE has bought up the bonds under its quantitative easing programme - will stay lower for longer. Economists polled by Reuters two weeks ago had expected the BoE to expand its asset purchase programme by 50 billion pounds in September, but BoE Governor Mervyn King stressed this week that central bank support could not forever postpone needed adjustments in an economy dealing with a massive debt overhang. "King's comments, with yesterday's GDP data, really cement the idea that the odds of QE in November have gone from being a very close call to less than likely that we do get it," Peck said. But with signs of recovery barely showing and the BoE's newer Funding for Lending Scheme (FLS) still to be proven, markets would be unwise to price out completely any further easing, said Societe Generale's UK economist Brian Hilliard. The FLS, which started in August, offers banks cheap finance if they increase lending to households and businesses. "It really depends on whether the projected acceleration of growth next year happens and if it doesn't then I still think the heavy lifting will be done by QE," Hilliard said. Link this Share this Digg this Email Reprints

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