Markets reassess QE outlook

UK interest rate expectations have started to edge up and UK equities have underperformed those overseas as investors have reacted to tentative signs in the Bank of England’s Inflation Report and from some MPC members that a further extension to QE has become less likely. UK gilt yields would probably also have risen, had it not been for a further sharp fall in perceptions of sovereign default risk. Nonetheless, although an extension to QE in May could be a close-run thing, we doubt that either GDP growth or inflation will be strong enough later this year to justify holding back from further asset purchases.