Italian troubles shouldn’t worry the MPC

While the fall in gilt yields over the past fortnight partly reflects an increase in safe haven demand, expectations for future interest rates have also slipped back. It seems unlikely, though, that an increase in euro-zone tensions will alter the prospects for interest rates in the UK. Overall, then, so long as the incoming economic data on the UK remains upbeat, our best guess remains that rates will rise again in August, and by three more times by the end of 2019. As such, we anticipate an increase in the 10-year gilt yield to around 1.75% by the end of this year.