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Another interest rate rise imminent?

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TheMotorcycleBoy
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Another interest rate rise imminent?

#227949

Postby TheMotorcycleBoy » June 8th, 2019, 12:20 pm

Just had a quick glance at the Reuters front page and observed the yield on GB 10YR bond to be very low (0.817%)

And bizarrely my eyes were drawn down to an article covering the our base rates:

https://uk.reuters.com/article/uk-brita ... KKCN1T82GX

I thought it unusual seeing the low bond yield expressing negativity in investing in our companies, but the article on potential rate rises as suggesting inflation (and hence growth from spending and productivity rises).

Wondered if anyone had any views on either.

Matt

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Re: Another interest rate rise imminent?

#228152

Postby WorkShy » June 9th, 2019, 3:26 pm

I'd say the following

1. It's important to distinguish between policy rates and long-dated bond yields. The 10-year Gilt yield can be argued to represent the possible path of monetary policy over the next ten years (with an appropriate credit spread). More realistically, however, it represents the likely path of policy over the next two years and then over the remaining maturity some form of neutral policy rate consistent with long-term real growth and inflation expectations. Given that expectations for both growth and inflation expectations are falling, then it's not impossible for 10-year Gilt yields to fall while expectations for policy rates rise.

2. The market remains pretty unconvinced that the BoE will raise rates (as can be seen in short sterling contracts). Globally, the Fed is very likely now to ease by year end (possibly in 2x25bp cuts). The ECB has extended forward guidance that rates will not rise until after mid 2020. It also opened the door to further cuts if inflation expectation continue to fall.

3. Globally bond yields are rallying hard and it's difficult for Gilts to resist that trend. Global inflation expectations are falling to dangerous levels and growth expectations are poor given forward looking indicators (PMIs) are weak

The essential problem for the BoE is that normally it would have raised rates a few times by now to keep up with the Fed tightening cycle. Due to the Brexit debacle that did not occur. At this point it really needs to raise rates (to give it more room to cut later) but it has missed it's clearest window of opportunity.

tikunetih
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Re: Another interest rate rise imminent?

#228158

Postby tikunetih » June 9th, 2019, 4:09 pm

No UK rate raise imminent - the next move will likely be back down again.


3. Globally bond yields are rallying hard


Typo: you mean govt bonds have been rallying hard and yields have been tanking.


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