The British pound rebounded off a two-week low on Wednesday as investors cast doubt on the Bank of England's commitment to ending emergency bond buys as scheduled, amid reports signalling the BoE could extend purchases should market conditions warrant.
The BoE that reiterated its programme of temporary gilt purchases will end on Oct. 14, although it noted that a number of facilities, including the new Temporary Expanded Collateral Repo Facility, are in place to support market functioning.
The Financial Times earlier reported that the BoE had privately indicated to bankers that it could extend bond buying beyond Friday's deadline if market conditions demanded it, citing three sources briefed on the discussions.
Analysts were in little doubt that if gilt yields continued to move higher, the BoE would have to renew its temporary bond-buying programme.
"The market appears to be second-guessing the Bank of England," eToro global markets strategist Ben Laidler said with respect to the relative strength in the pound on Wednesday. "It's inconceivable that if these levels of market stress in the bond market continue that the Bank of England is not going to continue to provide at least some element of support."
By 1034 GMT, the British pound was up 1.1% against the dollar to $1.1081, snapping five days of losses. It fell 0.9% on Tuesday after BoE Governor Andrew Bailey said the emergency bond-buying programme would stop at the end of the week.
Britain's 20-year gilt yield hit its highest level since 2008 on Wednesday. The 30-year yield touched its highest since the BoE announced it would intervene in gilt markets last month. ,
"The market was very shocked by how decisive Bailey was on Tuesday," said Michael Brown, head of market intelligence at Caxton, adding that he had expected the BoE to extend gilt purchases beyond Friday's deadline.
"What the market wants is a commitment from the BoE saying they will backstop the gilt market in as much size as needed for as long as needed to ensure financial stability. Until the market gets that, I think any sterling rallies are ripe to be sold into," Brown added.
Meanwhile, official data showed Britain's economy unexpectedly shrank by 0.3% in August, hit by weakness in manufacturing and maintenance work in the North Sea oil and gas fields.
Still, analysts did not expect weaker-than-forecast growth to deter the BoE from continuing to raise rates to help corral a major increase in inflation this year.
"Despite the weakening economic outlook, we continue to expect the Bank of England to step up the pace of their tightening in November," said Modupe Adegbembo, G7 Economist at AXA Investment Managers.
Adegbembo sees a 75-basis-point rate hike at the next meeting, with the chance of a larger 100-basis-point rate rise if finance minister Kwasi Kwarteng does not set out a credible fiscal plan on Oct. 31.
Money markets are fully pricing in a full-point rate rise from the Bank of England at its November meeting, according to Refinitiv data.
