UK markets continue to think that official interest rates will rise in mid-2015 despite some dovish signals from the Monetary Policy Committee (MPC) over the last month. In particular, MPC members have emphasised that there is likely to be a case for keeping interest rates on hold even after the 7% unemployment rate threshold is reached. In contrast, the fall in US market interest rates despite consensus-beating news on GDP and employment suggests that the Fed has been more successful than the MPC in convincing the markets that interest rates will not rise soon, even if it tapers its asset purchases in the next month or two. In response to the divergence in expectations for interest rates in the UK and US, sterling has appreciated to a two-year high against the dollar. Changes to the MPC’s guidance or bolder action from the Committee may be needed to prevent the stronger pound cooling the UK’s recovery.
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