Monetary policy to remain a support for asset prices

We doubt that UK asset prices will be undermined significantly by the onset of tighter monetary policy in the UK or overseas. Admittedly, history suggests otherwise – the global monetary tightening cycle that began after the early 1990s recession resulted in a so-called “bloodbath” in the bond market. But the Monetary Policy Committee has learnt the lessons of that episode. Although its forward guidance has been widely derided, the message that interest rates are likely to rise only gradually seems to have been largely received by investors. Moreover, since there are few signs that the economic recovery is generating inflation – indeed, by raising productivity, it may be helping to bring inflation down – we think that Bank Rate could remain on hold until well into 2015 and will then rise only very gradually. Since markets are braced for slightly earlier interest rate rises, there is scope for gilt yields to remain near current levels and for sterling to ease against the dollar this year.