After a summer in that global fixed income securities After losing ground for five weeks in a row, UK bond markets are expecting further interest rate hikes. However, economic data suggests that this view is too pessimistic. Compared to other major economies Great Britain appears to be the only country sticking to monetary policy tightening. The question is: how long can this position be held?
The indicators suggest that inflation is gradually easing and interest rates elsewhere in the world could fall. In addition, rising unemployment and signs of contraction in the services sector raise questions optimistic market expectations. A device at the Bank of England Museum invites visitors to experience the frustrating life of a monetary policymaker for themselves.
The visitor drives a Leverage, called “bank interest rate,” Raising and lowering attempts to bring a metal ball representing inflation toward the 2% target. The task is impossible. While moving the lever In one extreme case, one mechanism continually changes the height of the other, simulating economic disruption and confusing your attempts to achieve balance. Once the bank interest rate has been increased, it must be reduced again.
Recent UK pay data has not helped to allay concerns The Bank of England must continue to rise If you want to control inflation, you should raise interest rates, which is why bond markets may remain choppy. All in all, the market could have ignored some of this pessimism.
“First, the market American treasure “Predicts at least two cuts in the same period, while the Eurozone envisages a full cut after the maximum in December 2023,” Fidelity experts comment in a recent report. The UK stands out as the only hardliner country, but the pessimistic expectations for the Federal Reserve and the European Central Bank (ECB) reflect economic trends that we believe will not pass the UK by.
And with the consumer price index for July, there are already signs that inflation in the British country is falling shows a decline of 7.9% inflation year-on-year from the previous month to 6.8% and from the October 2022 peak of 11.1%. For its part, the National Statistics Office has published an analysis of the “common trend component”. where volatile prices are excluded, B. in energy and fuels, and shows that inflation plateaued at the end of last year and then fell between May and July 2023.
Both series support the current market consensus that the inflation of the The UK consumer price index will be between 2% and 3% for most of 2024. Added to this is unemployment, which rose on a three-month average from 3.9% in March to 4.2% in June. The Bank of England’s argument for a limited rise in unemployment is based on the assumption that companies will be reluctant to lay off staff Fear of running into the same problems of new hires they experienced in the post-pandemic period.
This acceleration of Unemployment calls this hypothesis into question, as did the services purchasing director index for August, which fell into contractionary territory. Unemployment is now just below the Monetary Policy Committee’s estimated break-even rate of 4.25%, four quarters earlier than the MPC expected.
The interest rate and bonds
Despite these clouds, the market is currently pricing in an interest rate real of around 3.5% next year, assuming a key interest rate of 6% and that the market forecast of inflation of 2.5% turns out to be correct. “The last time real interest rates approached this level was before the global financial crisis, when global debt was rising The United Kingdom was much smaller than it is today”, describe the analysts of the American manager. The British economy is now much more sensitive to the cost of debt. How high can the profitability of gilts be?
Since the Central banks began raising interest ratesIt was a thankless task to predict prime returns. “However, we appear to be nearing the end of the rally cycle and becoming more bullish on UK government bonds… At turning points, markets move quickly, Therefore, it may be wise to start preparing now”, they say. This leverage of bank interest rates can be unpredictable.
The consensus assumes that the downward path can still continue, although not as wide. Goldman Sachs pointed out in a recent report: “Gilts could still suffer from turnover in this process of the UK fighting inflation, although it is true that fewer would be left to find important support.” The Bleeding matters and the British country is first within European geography, which has entered a recession. The schema is now more clearly defined, but may still have some problems. And investors know it.