British gilts slump as Chinese rate cut boosts risk assets

LONDON, Aug 25 (Reuters) - British gilt futures slumped on Tuesday as China's interest rate cut gave risk markets a boost, one day after panic selling in Chinese stocks shook global financial markets.

China's central bank cut interest rates and lowered the amount of reserves banks must hold for the second time in two months, boosting support for a stumbling economy and a plunging stock market.

Gilt futures were down 69 ticks on the day at 118.76, taking 10-year yields well off 4-month lows hit in the previous session. Ten-year yields were up 7 basis points on the day at 1.88 percent.

Short sterling interest rate futures also fell sharply but the most widely traded June 2016 contract remained close to a contract high hit in January.

"It (Other OTC: ITGL - news) 's a response rather than a change of the assessment of the underlying macro view," Simon Peck, strategist at RBS (LSE: RBS.L - news) said of the rate move.

Markets have pushed back their expectations on the timing of Britain's first rate hike in over seven years after only one member of the Bank of England's rate-setting committee voted for a rate hike in August and as uncertainty about China's economy has clouded the global outlook.

John Wraith, UK rate strategist at UBS (NYSEArca: FBGX - news) , said bets for a first rate hike had been pushed out three months over the past two weeks or so to late third quarter from the middle of 2016.

That was in line with the timing implied on Tuesday by sterling overnight index swaps, dated against central bank meetings, according to Reuters calculations of ICAP (Amsterdam: IA6.AS - news) data.

"Clearly CPI (consumer price inflation) is going to be lower for longer if the oil price stays down here compared to where it was a few weeks ago, so it's a fairly rational response but we haven't fundamentally changed our view on the outlook for the UK itself," Wraith added.

RBS's Peck said the market was fully discounting a first rate hike by August 2016, saw a 70 percent probability of a hike in May and a 35 percent chance of such a move in February.

"The market has in recent weeks pared back its expectations of the timing of lift-off," Peck said.

"But I think we are starting to get to the point now where the front-end looks a little bit ... rich in context of the fact that the BoE (Bank of England) and the Fed (U.S (Other OTC: UBGXF - news) . Federal Reserve) made it clear their intention and their agenda to begin policy normalisation."

Sept long gilt future 118.72 (-0.73)

Sept 2015 short sterling 99.40 (-0.01)

March 2016 short sterling 99.25 (-0.02)

10-year yield 1.88 pct (+7 bps)

-------------------KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO (Reporting by Ana Nicolaci da Costa; Additional reporting by Andy Bruce; Editing by Alison Williams)