Reflecting on today's MPC inflation report, for those who were concerned interest rates were likely to raise in the near term, that notion was firmly put into touch. The Governor of the Bank of England, Mark Carney, widened his scope of criteria before he would "even consider a rate rise". As I have pointed out in this blog on previous occasions, spare capacity and lack of wage inflation ensures that, at least in the near-term, inflation is not an issue.
Not only did Mr Carney clarify the position on interest rates he made it clear that the bond purchase program will continue until the first rate rise. Mr Carney went on to say that when rates do start to rise it will be modest as well as gradual and that he illustratively agrees with the markets current expectations of interest rates to be no more than 2% in 3 years time.
The equity market reacted in a fairly muted way to the Bank of England report; after better than expected China export data and Yellen’s testimony to congress got it off to a good start. Once again the equity market rallied once the Vix moved above 20 and is now trading back below 15. After a decent rise equities prices paused for breath on Wednesday.
UK government bond yields rose modestly today, with the ten-year bond moving back above 2.8%. Likewise, US ten-year yields moved slightly higher, back over 2.75%. It appears at present the bond market agrees with the central bank governor that inflation is not an issue.
So one is left with the conclusion that interest rates are remaining at these levels for the foreseeable future, economic conditions are improving, and the economy is growing in real terms as inflation remains under control. In my view this should continue to provide a positive backdrop for equity investors.
My views were quoted in the Economic Voice on Wednesday and you can read the article here: Unemployment Going Down But Interest Rates Going Nowhere