Asset prices tumble on fears of monetary tightening

Investors’ fears that central banks will tighten – or at least stop loosening – monetary policy sooner than previously thought have prompted both UK equity and bond prices to fall sharply. Upward revisions to expectations for official interest rates have been more pronounced in the UK than in either the US or euro-zone, reflecting the bigger turnaround in news on the UK economy than overseas. Our view remains, though, that a hike in Bank Rate within the next two years is unlikely, given the big challenges ahead for the UK’s economic recovery. Indeed, we still think that Mark Carney will make an interest rate pledge soon after he arrives at the Bank of England next month.