The sterling overnight interbank average rate implied an 88% probability of a rate rise a week ago. Now it's down to 50/50
Sonia says interest rates aren't going up any time soon. Sonia is the sterling overnight interbank average rate, which is one way to measure where the market thinks interest rates are going. A week ago, Sonia implied an 88% probability of a rise by next March. Today the probability was just 56% ? almost a flip of a coin. What's happened?
Plenty. The oil price continues to fall from its high of $125 a barrel in April to $112, providing hope that UK inflation will indeed start to decline after reaching a peak of 5%, just as the Bank of England's models predict. Meanwhile, the "soft patch" in the global economy is not going away ? or, as today's minutes of the latest meeting of the monetary policy committee put it, "the current weakness of demand growth [is] likely to persist for longer than previously thought". And the eurozone crisis is depressing confidence.
Now there's a new element to consider: the MPC is already thinking about more quantitative easing. For "some" members ? ie not just Adam Posen, a long-standing advocate of more QE ? "it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised".
Admittedly, the "if" in the sentence stands out a mile. Admittedly, too, the MPC is fretting that it may have overestimated the spare capacity in the economy. But the mere fact that QE is back in the spotlight is significant. Two members of the MPC still want a rate rise but the committee as a whole does not appear to be in any hurry to tighten policy. A lot can happen in nine months ? but a coin-flip on next March's rate does indeed look the correct odds.
Source: http://www.guardian.co.uk/business/2011/jun/22/interest-rates-going-up-sonia
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