One year on from the start of the credit crunch, distortions in the money markets remain and most securitisation markets are still closed. But the sharp fall in the oil price over the last month appears to have eased the markets’ inflation concerns. Falling break-even inflation rates have played a significant role in dragging bond yields in the UK sharply lower. Meanwhile, hopes that the inflation outlook will become less of a constraint on the MPC have resulted in lower market interest rate expectations, especially beyond the next few months. Our forecast that the MPC will eventually reduce interest rates all the way to 3.5% suggests that this move has further to go.
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