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London - It’s getting increasingly difficult to convince investors that the Bank of England will tighten monetary policy any time next year.
With volatility-plagued stock markets and a slowdown in China threatening to derail the global economy, traders have been relentlessly setting back their predictions for when the Federal Reserve and BOE will raise interest rates from record lows.
While Fed chair Janet Yellen said on September 24 that the US central bank was on course to move in 2015, investors remain skeptical as economic data signal that neither country is immune to the turmoil emanating from emerging markets.
Both last week’s US labour-market report and Monday’s UK services data came in below the most pessimistic forecasts in Bloomberg economists surveys.
Traders now don’t see a rate increase by the BOE until 2017 and while the central bank might not wait as long as that, it is understandable why markets are positioned that way, said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA.
The BOE’s official bank rate has been at 0.5% since March 2009. Governor Mark Carney has signaled the decision about higher rates will become clearer at the turn of the year.
“We have been here before, expecting a BOE rate rise in the not-so-distant future and it has not materialized,” Simpson said. “That is effectively why the market is priced as it is because they are telling you that they don’t really believe what the central banks are saying. It’s the same for the Fed.”
Using short-sterling implied yields and adjusting these using the relevant LIBOR/OIS spread adjustment, BOE liftoff is priced somewhere between the December 2016 and March 2017 contracts.
Fragile sentiment
A majority of analysts still expect the BOE to move in the first quarter of next year, according to a Bloomberg survey, but a few have moved their calls for an increase to the following three-month period. Strategists at Barclays said they expect the UK central bank to act within three months of its US peer.
“The BOE rate hike is priced in quite far out to the first quarter of 2017,” said Nikolaos Sgouropoulos, a London-based foreign-exchange strategist at Barclays. “Sentiment is quite fragile, you could get risk sentiment turning sour very, very quickly.”
The BOE is due to release its latest rate and asset- purchase program decisions on Thursday, alongside the minutes of the Monetary Policy Committee’s meeting.
Sgouropoulos said that policy makers might signal that the “current environment doesn’t merit a change in stance by the BOE and that could bring back expectations for the first rate hike by a few months.”
The pound was little changed at 73.88 pence per euro as of 11:44, having reached 74.43 pence on October 2, its weakest level since May 7. Sterling rose 0.2% to $1.5176. The UK currency declined versus most of its 16 major peers on Monday.
UK government bonds fell for a second day as the Debt Management Office auctioned £1.5bn of securities due in September 2034.
Benchmark 10-year gilt yields increased one basis point to 1.80%. The 2% bond due in September 2025 dropped 0.11% per 1 000-pound face amount, to 101.84. The yield climbed eight basis points on Monday.
