With another hike in interest rates in May now largely priced into markets (and supported by this week’s Monetary Policy Committee (MPC) Minutes), the bigger question is just how “limited and gradual” the rise in interest rates will be thereafter.
Markets are only pricing in three hikes over the next two years, which seems exceptionally low compared to the pace and the overall amount of tightening seen in previous cycles. With the economy holding up relatively well, the MPC less tolerant now of above-target inflation than in the recent past, and a desire to return interest rates to some new “normal” level, we think that interest rates will rise three times this year, and twice further in 2019 – more than markets expect.
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