(Bloomberg) -- Higher interest rates in the U.K. are very much out of sight for the markets. Not just for the next few months or few years -- but possibly forever.
This week saw the yield curve inverting for the first time since the financial crisis, but what's more interesting is that this time around, the Bank Rate is at just 0.75%, compared with almost 6% then.
Yield curves typically invert after central banks hike rates beyond the neutral rate. The Bank of England hasn't been able to really get going with a hiking cycle given slowing growth and Brexit-related damage to sentiment.
- One-month Sonia forward curve is priced for Bank Rate of 35bps at the three-year BOE forecast horizon and a peak of around 50bps over a 30-year time frame, suggesting normalization in interest rates is off the cards
- To be sure, using forward rates to gauge market expectations of future prices can be no better than a random walk
- But, as the saying goes in the markets, the current price is the price, and it's representative of a no-deal Brexit outcome (betting odds around 40%) and global yield-grab theme
- Still, all roads point to fiscal loosening, and it's likely to lead to large increases in public-sector borrowing and potentially a steeper 10s30s gilt curve
- The BOE has a unique problem of elevated inflation expectations compared to other developed economies. What's more, inflation will likely move higher in a no-deal Brexit scenario from a further decline in sterling and tariffs
- While the negative growth shock of a no-deal Brexit will likely be met with immediate rate cuts, the central bank may also become boxed in by rising inflation
| Read More Analysis Here: This Part of the U.K. Market Is Glossing Over a Spending Problem |
- NOTE: Tanvir Sandhu is a global fixed income and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net
To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net
©2019 Bloomberg L.P.
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