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Bonds round-up: Producer prices hit UK rate cut hopes

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Date: Monday 12 May 2008

LONDON (ShareCast) - Hopes of a cut in UK interest rates next month were dealt a blow today by alarming Producer Prices data.

Soaring costs of food, fuel and other raw materials pushed the price of goods leaving the UK's factories up by record levels last month, casting doubt on the prospect of another interest rate cut soon.

Output prices rose by 1.4% during April, pushing the annual rate up to 7.5%, the highest level recorded since the figures were first compiled by in 1986. The cost of raw materials also rose by a record level, increasing by 2.6% month on month and 23.3% year on year.

Even excluding food, drink, tobacco and petrol, inflation rose by rose by 1% in April and pushing the annual rate to 4.6%, up from 3.4% in March.

The unwelcome rise gives less scope for the Bank of England to cut interest rates next month; a rate cut would stimulate the economy but also fan the flames of inflation.

Gilts moved lower after the release of the data, pushing the yield on the 10-year gilt up 3 basis points to 4.61%.

European government bonds also gave ground, as equities returned to favour. The yield on the benchmark 10-year bund rose one basis point to 4.01%.

US treasuries were firmer, however, ahead of tomorrow’s retail sales data which is expected to show a fall for April.

The yield on the 10-year note fell 4 ticks to 3.74%.

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