Our views

Gilt corner: when will UK rates next rise? Maybe May, maybe not


Craig Inches, Head of Rates and Cash 

24 April 2018

With just eight monetary policy committee (MPC) meetings to occupy their year, the nine-strong membership of the Bank of England’s MPC have more time than ever to go out and communicate their thinking to the market. 
And when they do this, they run the slightly unusual risk of saying something interesting. As anyone who’s watched Mario Draghi’s deadpan delivery at European Central Bank (ECB) press conferences will tell you, staying completely on message, and having that message correctly interpreted by the press is an art form in itself.
Which is why, despite sticking pretty clearly to the script, Mark Carney’s comments to the BBC managed to stoke speculation that the Bank might not be raising rates come May. What he said, and indeed, what he has always said, is that markets should pay attention to the data. And last week’s data told a slightly shaky story.
Inflation came in below market expectations with headline Consumer Price Index (CPI) of 2.5%, suggesting that after an extended plateau at the beginning of the year, price increases look set to tail off sharply. Compounding this were softer than expected numbers for retail sales and wage growth, painting the UK economy in a slightly less robust way than previously forecast. All eyes in the market are now turning to the Q1 GDP number due this Friday. 
Whether any weakness is a seasonal blip remains to be seen, but in our view the Bank shouldn’t use it as an excuse to hold off from raising rates in May,  having already missed a good opportunity to hike when data was robust in February. And given the relatively nonchalant reaction from gilts to the governor’s comments (in contrast to the more sensitive bellwether of sterling), the market’s still betting on a hike in May. 
In our government bond portfolios we’ve closed out our short positions at the front end of the market, a move which held up pretty well for us while longer dated yields rose last week. We’re also expecting some further weakness in longer dated yields, with new syndications of 30 and 50 year bonds expected in the coming weeks. Elsewhere we’ve been pining for the fjords, buying a little Norwegian government debt which had cheapened up into a recent supply event there.
Central bankers will keep on ‘communicating’ and driving whole markets up and down, but making tactical moves around these technical supply and demand events feels like a better method for incremental outperformance, in our opinion.

With just eight monetary policy committee (MPC) meetings to occupy their year, the nine-strong membership of the Bank of England’s MPC have more time than ever to go out and communicate their thinking to the market. 

When they do this, they run the slightly unusual risk of saying something interesting. As anyone who’s watched Mario Draghi’s deadpan delivery at European Central Bank (ECB) press conferences will tell you, staying completely on message, and having that message correctly interpreted by the press is an art form in itself.

Which is why, despite sticking pretty clearly to the script, Mark Carney’s comments to the BBC managed to stoke speculation that the Bank might not be raising rates come May. What he said, and indeed, what he has always said, is that markets should pay attention to the data. And last week’s data told a slightly shaky story.

Inflation came in below market expectations with headline Consumer Price Index (CPI) of 2.5%, suggesting that after an extended plateau at the beginning of the year, price increases look set to tail off sharply. Compounding this were softer than expected numbers for retail sales and wage growth, painting the UK economy in a slightly less robust way than previously forecast. All eyes in the market are now turning to the Q1 GDP number due this Friday. 

Whether any weakness is a seasonal blip remains to be seen, but in our view the Bank shouldn’t use it as an excuse to hold off from raising rates in May,  having already missed a good opportunity to hike when data was robust in February. And given the relatively nonchalant reaction from gilts to the governor’s comments (in contrast to the more sensitive bellwether of sterling), the market’s still betting on a hike in May. 

In our government bond portfolios we’ve closed out our short positions at the front end of the market, a move which held up pretty well for us while longer dated yields rose last week. We’re also expecting some further weakness in longer dated yields, with new syndications of 30 and 50 year bonds expected in the coming weeks. Elsewhere we’ve been pining for the fjords, buying a little Norwegian government debt which had cheapened up into a recent supply event there.

Central bankers will keep on ‘communicating’ and driving whole markets up and down, but making tactical moves around these technical supply and demand events feels like a better method for incremental outperformance, in our opinion.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.