With households seeing little if any real income growth, it is unlikely that the BOE would want to shock consumers and businesses with a 2014 rate rise, preferring instead to wait until the recovery is more firmly established and GDP is back well above its previous peak.
Our gilt yield forecasts, which assume a modest rise in yields from current levels, are predicated on a 2015 interest rate rise and very gradual path of increases thereafter. The UK economy is more sensitive to short rates than is the US, with many loan rates priced off policy rates, so it would take only minimal policy tightening to slow the economy. With bond yields having risen recently, much of the improvement in UK economic prospects over the past year has already been widely discussed, so to some extent should be in the price.
The ‘emergency’ monetary policy strategy of central banks has been based on the assumption that rising asset prices will support economic growth. A lengthy period of unchanged rates should continue to support ‘riskier’ asset classes.
The main risk to this view is the possibility that policy tightens much earlier than we expect and/or that markets are overshadowed by other developments, for example a return of Euro stress.
Will interest rates be hiked or will they remain as they are? Let us know your thoughts below.
