BoE rate hike bets fade in markets after weak inflation

LONDON, July 18 (Reuters) - Expectations among British

government bond investors that the Bank of England might hike

interest rates soon faded on Tuesday after an unexpected fall in

British inflation, the first since October last year.

Gilt yields fell by the largest amount in over a month

following the data which showed the consumer price index rose an

annual 2.6 percent in June, a lot less than the 2.9 percent

increase predicted in a Reuters poll.

Five- and 10-year gilt yields fell 6 basis points

on the day to 0.60 percent and 1.21 percent, marking their

lowest levels since June 28.

Short sterling interest rate futures also rose after the

data, another sign that investors were pushing back their

expectations for when the BoE (Shenzhen: 000725.SZ - news) might raise rates.

Gilt yields have retraced most of their gains since late

June when BoE Chief Economist Andy Haldane said he could soon

join a minority of rate-setters who want higher borrowing costs,

blowing apart the consensus on Monetary Policy Committee.

Since then, economic data have largely come in weaker than

expected, raising questions about the likelihood of a rate hike

any time soon. The BoE's next announcement on interest rates is

due on Aug. 3.

"Today's inflation figures reinforce our view that the Bank

of England will be content to hold policy steady when it meets

in August," said Investec (LSE: INVP.L - news) economist Victoria Clarke.

Overnight index swaps dated to MPC meetings suggested there

is now only a roughly 1-in-5 chance of a rate hike by the end of

the year, compared with a 1-in-2 chance a couple of weeks ago,

according to Reuters calculations.

The yield spread between 10-year British and

German government bonds stood at 65.2 basis points,

the lowest since around late August 2016 and down around 4 basis

points on the day.

Sept long gilt future 126.14 (+0.68)

Dec (Shanghai: 600875.SS - news) 2017 short sterling 99.58 (+0.04)

March 2018 short sterling 99.52 (+0.05)

10-year gilt yield 1.21 (-6 bps)

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Long Gilt futures Gilt benchmark chain

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Deposit rates Sterling cross rates

UK debt speedguide

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U.S. Treasuries Debt reports

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(Editing by Catherine Evans)