Pound and UK assets shrug off BoE balancing act

By Jaspreet Kalra, Naomi Rovnick and Canan Sevgili

MUMBAI/LONDON, Sept 18 (Reuters) - The pound and other UK assets held steady on Thursday, after the Bank of England kept rates unchanged and slowed the pace of its government bond holdings, as policymakers grapple with stubborn inflation, sluggish growth and a volatile debt market.

Policymakers voted 7-2 to keep rates unchanged at 4% while slowing the annual pace at which the BoE sells gilts it purchased between 2009 and 2011 to 70 billion pounds from the current 100 billion pounds, in line with economist forecasts.

UK inflation is almost twice the central bank's 2% target, and there are growing signs of weakness in the labour market. Yet money markets are only fully pricing in another rate cut by March next year, something some investors believe may be overly pessimistic.

"There could be good news on the horizon that allows a few more cuts than the market expects. Commodity prices are not going up and that may weigh on inflation," said Christopher Mahon, multi-asset manager at Columbia Threadneedle.

Sterling GBP= dipped 0.1% to $1.3619, from $1.3649 before the decision, but was still not far off Wednesday's two-month high. The benchmark 10-year gilt yield was a touch lower at 4.611% after the decision was announced, while sterling GBP=D3 was little changed at $1.3622.

MOST STAGFLATIONARY DEVELOPED ECONOMY

"The UK is now the most stagflationary economy in the developed world. A brutal mix of high inflation, weak growth, and rising unemployment," said Lloyd Harris, head of fixed income, Premier Miton Investors.

"The next big moment for the BoE and for all sterling markets is the Autumn Budget," Harris said.

Finance Minister Rachel Reeves will present her budget on November 26. She is under pressure to stick to her own rules on borrowing to keep Britain's finances on track, as reflected in some of the large swings in yields on long-term UK bonds this year.

The central bank said it would skew sales away from long-dated gilts to minimise the impact on turbulent bond markets. Britain's 30-year borrowing costs had climbed to their highest level since 1998 earlier this month but have since eased.

"The Bank of England’s decision to slow its pace of bond sales was fairly consensus, but the decision to skew those sales towards shorter maturities should provide some relief to the long-end," said Matthew Landon, global market strategist at J.P. Morgan Private Bank in London.

The 30-year gilt yield GB30YT=RR was steady at 5.438%. They have risen by a full percentage point in the last 12 months.

The BoE is alone among major central banks in conducting outright sales of the government bonds it bought to boost the economy in the years after the 2008 global financial crisis, rather than just letting them mature.

Britain's equity markets gained slightly after the BoE's decision was announced with the benchmark FTSE 100 .FTSE stock index last up 0.3%, while the more domestic-focused mid-cap stock index .FTMC was up nearly 0.4%.

"There’s always going to be some sensitivity around the future inflation profile. And given the background of where the UK has been, I expect the Bank of England to remain cautious," Matt Hudson, UK portfolio manager at River Global, said.