Donald Trump’s victory has exacerbated the upward movement in Treasury yields, pushing 10-year UK gilt yields higher too. Meanwhile, market participants have revised up their expectations for official interest rates in the UK further over the past month or so. Indeed, while the the latest published economist consensus forecast still points to a further cut in interest rates over the next couple of quarters, markets now appear to be pricing in a rate rise in the first quarter of 2019. This appears to have been in response to better than expected incoming data, and some concerns about the potential adverse impact of the pound’s drop on inflation. Granted, the MPC’s communication suggests that it will continue to “look through” a period of above-target inflation. What’s more, the latest published consensus still suggests that GDP growth will slow to just 0.8% next year, much lower than the MPC’s 1.4% forecast. But we think that markets have got it broadly right. We expect the economy will perform reasonably well over the next few years and by 2019, or possibly even sooner, a move away from the current “emergency” levels of interest rates will be justified.
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