Markets reading the roadmap to higher interest rates wrong

The surge in 10-year gilt yields to a one-year high of more than 0.80% this week has been driven by the markets’ expectations that the economic recovery will prompt the Bank of England to raise interest rates sooner and further. But the Bank has indicated that even as activity and inflation rebound, it won’t rush to raise interest rates. In fact, we think rates will still be 0.10% in five years’ time. As such, unless the Bank becomes more hawkish, there is not much scope for gilt yields to rise that much further.