Markets rise on hopes of inflation fall3 Feb 2023 05:47
Markets rallied yesterday as investors bet that the Bank of England was nearing the end of its restrictive monetary policy after more than a year of firefighting high inflation.
UK government borrowing costs fell to a three-month low and stock prices rose after Andrew Bailey, the Bank’s governor, who has been battling the highest price rises in 40 years, said there were signs that inflation was “turning a corner”.
The Bank’s monetary policy committee raised interest rates by 50 basis points to 4 per cent, in line with market expectations. It upgraded its growth forecast, indicating a shallower recession than previously predicted for 2023.
Bullish investors now expect big central banks to end their aggressive monetary policy action by next month as falling energy prices improve economic conditions. On Wednesday the US Federal Reserve hinted at one more rate rise, while the European Central Bank said it would carry out another tightening next month.
Two-year gilt yields, which are sensitive to interest rate changes, dipped 23 basis points to 3.2 per cent, the lowest since November. Yields on the ten-year gilt, a proxy for the government’s borrowing costs, fell from 3.3 per cent to 3.06 per cent, a two-month low. Investors also sold the pound, which fell by 0.7 per cent against the dollar to $1.22, while FTSE 100 stocks rose by 0.7 percentage points.
Despite the MPC saying that wage growth could push inflation higher, investors “have become much more confident on a decline in inflation going forward”, Derek Halpenny, head of research at MUFG, the Japanese bank, said. The market reaction came after a doveish response to the Fed’s decision to raise interest rates by 25 basis points.
“The MPC is clearly more concerned about inflation, given the stronger risk bias, but with investors more convinced of a turn lower in inflation than at any time since the global inflation shock emerged, it seems more likely than not at this juncture that market participants will assume the upside risks will not be realised,” Halpenny said.
Money markets are pricing in one smaller rate increase from the Bank in March, then cuts to monetary policy by the end of the year. The Bank’s medium-term forecast shows inflation falling below 2 per cent, suggesting that monetary easing may be required to prevent disinflation taking hold by 2024.
Analysts said there was a growing likelihood that the Bank would pause on further rate rises, after lifting interest rates from close to zero to 4 per cent over 14 months. Benjamin Nabarro, at Citi, said an inflationary surprise was unlikely between now and the Bank’s next meetings in March and May.
https://www.thetimes.co.uk/article/markets-rise-on-hopes-of-inflation-fall-zj3z5hmxd
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