Rate expectations continue to fall

The continued weak news on the UK’s economic recovery and recent falls in commodity prices have led markets to revise down further their expectations for official interest rates. Overnight index swap (OIS) markets now expect official interest rates to remain on hold until the very end of the year. Only a couple of months ago, OIS markets had priced in around three 25 basis point hikes in official rates by then. Real yields in the gilt market have also fallen back to their recent lows seen in November 2010. Meanwhile, gloomier expectations for the strength of the UK’s economic recovery this year in the wake of the poor GDP figures for the first quarter appear to have contributed to the pound’s further weakness against the euro.