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Hopes of inflation fall.

 The Bank's monetary policy committee raised interest rates by 50 basis points to 4 per cent, in line

Index

with market expectations. On Wednesday, the US Federal Reserve hinted at one more rate rise, while the European Central Bank said it would carry out another tightening next month. As a result, two-year gilt yields, sensitive to interest rate changes, dipped 23 basis points to 3.2 per cent, the lowest since November. Likewise, yields on the ten-year gilt, a proxy for the government's borrowing costs, fell from 3.3 per cent to 3.06 per cent, a two-month low.

Investors also sold the pound, which fell by 0.7 per cent against the dollar to $1.22, while FTSE 100 stocks rose by 0.7 percentage points. Although the MPC (Monetary Policy Committee) said wage growth could push inflation higher, investors «have become much more confident on a decline in inflation going forward," Derek Halpenny, head of research at MUFG, the Japanese Bank, said. «The MPC is more concerned about inflation, given the stronger risk bias, but with investors more convinced of a turn lower in inflation than at any time since the global inflation shock emerged, it seems more likely than not at this juncture that market participants will assume the upside risks will not be realised,» Halpenny said. As a result, money markets are pricing in one more minor rate increase from the Bank in March, then cuts to monetary policy by the end of the year.

The Bank's medium-term forecast shows inflation falling below 2 per cent, suggesting that monetary easing may be required to prevent disinflation from taking hold by 2024. Analysts said there was a growing likelihood that the Bank would pause on further rate rises after lifting interest rates from close to zero to 4 per cent over 14 months.

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  1. Vernon3 February 2023 at 10:42

    The confidence of investors on a decline in inflation will help lead to the actual decline. So I expect this to be the case. I don't think there will be a minor rate increase in March.

    ReplyDelete
    Replies
    1. Tom3 February 2023 at 15:11

      I'm seeing a small increase in March from the Bank. Things are not yet where they should be now. But after that, no increases until the end of the year, probably.

      Delete

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