European government bonds, gilts lower ahead of ECB, BoE rate decisions

European government bonds, gilts lower ahead of ECB, BoE rate decisions

	Published : Thu, 08 Mar 2007 11:14 By : Agencies Print this Story

LONDON (AFX) - European government bonds and UK gilts were lower in cautious trade ahead of today's interest rate decisions by European Central Bank (ECB) and Bank of England (BoE).

ECB is expected to raise its main refinancing rate to 3.75 pct, from 3.50 pct, after previous comments from ECB president Jean-Claude Trichet preparing the ground for another tightening move.

Attention will therefore focus on Trichet's accompanying press conference for signals on further rate moves.

'The market will obviously focus on the ECB press conference today against the backdrop that it is already fully pricing in the well-signalled 25 basis point rate hike,' analysts at WestLB said.

Any mention by Trichet of monetary policy still being accomodative or of concerns about medium-term inflationary pressures will be taken as a signal another rate hike can be expected.

WestLB analysts believe Trichet will 'clearly lean on the hawkish side', without putting much weight on the recent developments in the global stock markets, which led to rallies in euro zone government bonds and Euribor futures.

'Consequently, we expect the short-end of the curve to come under pressure as investors will probably be driven to increase bets on another rate hike,' they said.

In the UK, gilts were also under pressure ahead of today's interest rate decision by BoE, which is widely forecast to leave interest rates on hold at 5.25 pct today, although bond market participants will be on alert to the risk that rate-setters may opt for a hike.

Last month's quarterly Inflation Report indicated interest rates would need to rise by a further quarter point at some stage in the coming months. Moreover, BoE's Monetary Policy Committee has not been averse to surprising the market, with the recent rate hike in January largely unexpected by markets.

Such a move would immediately spark selling in gilts, though a no-change decision would have little impact given that details of the MPC's deliberations will not be known until the minutes are released in two weeks time.

At Yield Change on

0947 GMT pct previous close

June euribor future (Liffe) 95.99 dn 0.01

GERMANY

March bund future (Eurex) 116.04 dn 0.13

3.75 pct April 2017 govt bond 98.52 3.93 dn 0.13

FRANCE

3.25 pct April 2017 govt bond 98.13 3.98 dn 0.10

March gilt future 109.38 dn 0.15

4.00 pct Sep 2016 govt bond 94.07 4.78 dn 0.13

June short sterling future 94.34 unchanged

September short sterling future 94.35 unchanged

jessica.mortimer@thomson.com

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