By Jack Mendel
The latter is always second guessing where governor Andrew Bailey and the rest of the monetary policy committee will send interest rates. The former rarely provides any clues.
Investors’ rate expectations are shaped by thousands of pieces of data, but they essentially boil down to a couple of key themes.
Firstly, inflation. Markets make their own assessment of where they think inflation is headed and how forcefully the Bank will have to respond. It’s above 10 per cent and has further to run, so it’s reasonable to assume the Bank will kick rates up a bit more.
Secondly, government policy. In the days after former prime minister Liz Truss’s ill fated mini-budget on 23 September, peak market rate expectations topped six per cent.
Market forecasts are derived from the yield curve, which plots how much UK debt returns over the course of time.
That curve over the last month shifted upward partly due to investors demanding a higher rate of return to digest Truss’s around £45bn borrowing splurge.
Expectations are now for rates to peak around 4.75 per cent after Rishi Sunak and Jeremy Hunt have ditched nearly everything in that package.
The Bank doesn’t get sucked into fiscal speculation. All its forecasts are based on existing government policy, so the record long recession they projected today may actually get worse after Sunak and Hunt raise taxes and cut spending on 17 November, as expected.
Threadneedle Street also typically doesn’t comment on market rate expectations, but today was a stark outlier.
The Bank said “further increases” in rates are coming, but “albeit to a peak lower than priced into financial markets”.
It’s easy to see why the Bank has told markets to chill out. If borrowing costs top five per cent, the UK will tumble into its longest recession since records began. Cumulatively, the economy would shrink nearly three per cent over the course of the slump.
Mortgagors will be hit by a £3,000 rise in their annual bills. Yes, inflation would fall quicker, easing pressure on household finances, but pain would trickle down via other routes.
The message from Bailey and the MPC today was clear: brace for a couple more rate rises, but don’t get carried away.
The post Editorial: Andrew Bailey’s guidance is a sign of just how shaky the economy looks appeared first on CityAM.
