The MPC’s recent hawkish comments have helped to push near-term interest rate expectations higher and have fuelled a further rally in sterling to its strongest trade-weighted level since October 2008. Ironically, sterling’s rise has perhaps given the MPC more scope to leave interest rates on hold, since a substantial undershoot of inflation below the 2% target now looks likely. Even so, the MPC seems confident that the recovery is secure and that Bank Rate should therefore not remain at ‘emergency’ levels for much longer. As a result, interest rates now seem most likely to rise in Q1 2015 and even a hike in 2014 cannot be ruled out. Nonetheless, we still think that markets are overlooking the extent to which low inflation will persuade the MPC to raise interest rates very gradually thereafter.
Become a client to read more
This is premium content that requires an active Capital Economics subscription to view.
Already have an account?
You may already have access to this premium content as part of a paid subscription.
Sign in to read the content in full or get details of how you can access it
Register for free
Sign up for a free account to:
- Unlock additional content
- Register for Capital Economics events
- Receive email updates and economist-curated newsletters
- Request a free trial of our services