Ten year gilt yields touched 0.67% last week, a new low for 2019, following the release of the Markit/CIPS UK composite Purchasing Managers’ Index for June at 49.7 (a level below 50 implies a contraction). This took the benchmark gilt yield below the UK base rate - a phenomenon was last seen in the depth of the global financial crisis. This has continued with the 10 year gilt yielding just over 0.70% this morning.
More unusual is that only a few weeks ago some members of the Bank of England’s Monetary Policy Committee (MPC) were suggesting that rates may have to rise. Why is this? Brexit aside, part of the reason may be down to attempts to slow down the market reaction to worsening data. This suggests a problem: is ‘forward guidance’ from the MPC losing credibility?
Is it better to listen to the market? Perhaps the best course of action would be for the MPC to drop forward guidance in its current guise.
It’s not easy at the moment, but there is a danger – not just in the UK – of central banks losing credibility. This would be a great shame as one of the best developments of the last decade or so has been the independence of central banks. At a time when this is coming under pressure, it’s important that credibility is maintained.
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