All UK rate hike bets are off

Pound sterling is the weakest currency in the world today and we’ve seen a pretty big gilt rally, with 10 year gilt yields rallying 7 basis points to 3.1% at the time of writing, the lowest yield in seven months. The trigger was the minutes from the last Monetary Policy Committee meeting, where the crucial sentences were ‘current weakness of demand growth was likely to persist for longer than previously thought’ and ‘further asset purchases might become warranted if the downside risks to medium-term inflation materialised.’

The markets are now pricing in a first rate hike in the UK for August 2012, which is quite incredible if you consider that back in January when I wrote this comment, the markets were pricing in three 0.25% rate hikes this year alone.  The chart below shows just how violent things have been, where  I’ve taken the market’s rate expectations for the month of August 2012 .  Earlier this year the market was almost pricing in five rate hikes, now it’s just one.   Anyone who’s been betting on a gilt sell-off or rate hikes will be in a world of pain.

On the subject of pain, and given the rain, we’re having a chuckle about Jim heading off to Glastonbury this afternoon.  It turns out that Richard was at Glastonbury in 1983-1985, although he can’t quite remember who he saw or what year it was.  I can empathise with what a wet Glastonbury is like, having been to one of the soggiest on record in 1997.  Thankfully great music makes you soon forget about the weather though – I was lucky enough to see what’s been voted as the best gig ever, although was unlucky enough to be caught on camera doing a John Redwood, as the BBC kindly reminded me on Friday night when they aired a repeat of the gig (I’m the gormless 17 year old in yellow just after 52 mins).