Markets reassess outlook for monetary policy

The continued run of positive data on the UK’s economic recovery has led markets to reassess the outlook for monetary policy. Markets now expect official interest rates to rise by around 1% over the next two years – still a modest tightening of monetary policy, but larger than the 0.5% or so expected only a month ago. Gilt yields have also risen, reflecting the slightly higher expected path of interest rates and the fading chance of more quantitative easing (QE) in the near term. In addition, equities, which appeared to benefit from speculation concerning an extension of QE in previous months, have held on to their recent gains, perhaps again in response to signs that the economic recovery has remained on track for now at least.