LONDON, Nov 4 (Reuters) - German government bond yields dropped to their lowest levels in a month on Thursday after the Bank of England kept its interest rates on hold, surprising markets that had priced in a 15 basis-point rate hike.
Following the U.S. Federal Reserve's announcement overnight that it would taper its bond purchases, the BoE confounded those expecting it to become one of the first major central banks to raise rates after the COVID-19 pandemic.
Seven of the BoE's nine policymakers voted to hold off a rate rise.
"What's surprising is that there was a clear majority not to hike. We thought it would be a bit closer. Some kind of combination of more dovish tapering from the Fed and the BoE decision not to hike is pushing yields lower," DZ Bank rates strategist Rene Albrecht said.
Germany's 10-year government bond yield, the benchmark for the bloc, dropped 6 basis points, hitting a one-month low of -0.23%.
Other high-grade euro zone government bond yields also dropped to their lowest level in weeks and Italy, perceived as one of the euro zone countries most sensitive to tightening policy, saw its 10-year bond yield drop 11 bps to 0.937%.
British 10-year borrowing costs, which have doubled since mid-August, were 13 bps lower on the day at 0.941%.
Central banks have been grappling with how to deal with high inflation readings from around the world when the global economy is still recovering from the COVID-19 crisis.
ECB chief Christine Lagarde said last week that the bank's last meeting was about "inflation, inflation, inflation". Subsequently, yields across the bloc rose to their highest levels in months.
On Wednesday, Lagarde moved to calm markets by saying rate hikes were unlikely in 2022, and this has anchored yields to an extent across the bloc.
"The BoE decision supports the view that the ECB may take even longer to hike rates as well," Albrecht said.
Also pushing yields lower was the euro zone purchasing managers index (PMI) business survey, which fell to a six-month low in October.
Supply chain bottlenecks and logistical issues related to the COVID-19 pandemic pushed input prices to rise at the fastest rate in over two decades, the survey showed. (Reporting by Abhinav Ramnarayan; editing by Barbara Lewis, Giles Elgood, Hugh Lawson, Ken Ferris)