Reflecting on April

Chances of UK Rate Rise Fall

Chances of a May rate rise in the UK decline

What has happened?

At the start of April the market implied probability, based on Overnight Indexed Swaps, of an interest rate rise from the Bank of England at its meeting on 10th May stood at 72%. At its meeting in March, seven of the nine members of the Bank of England’s Monetary Policy Committee (MPC) voted to keep rates on hold, with the two dissenters making the case for higher rates. Although the majority disagreed, the MPC’s statement revealed that the collective judgement of the committee was that “an ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation” to the bank’s target, supporting expectations of an imminent rate rise. Much has changed since then and at the time of writing the same market implied probability of a rate rise next Thursday stands at just 10%.


A combination of factors have led to the sharp decline in expectations of tighter monetary policy from the Bank of England. The most significant of these is perhaps the performance of the UK economy over the last few months. The Citigroup UK Economic Surprise Index, which is an aggregate measure of how economic indicators have performed against expectations, is at its lowest level since 2012. Specific data points that have missed expectations include inflation for March which, as measured by the Consumer Prices Index, declined from 2.7% to 2.5%. Meanwhile, Q1 GDP, PMI surveys for April for both the manufacturing and services industries, and March retail sales data all have recently missed expectations.


The lower probability of a rate rise from the Bank of England has impacted financial markets. UK government bonds outperformed their US counterparts during April, particularly at the short-end of the yield curve as the yield on the 2-year gilt declined from its April high of 0.92% to its current level of 0.78%. Sterling, meanwhile, which had strengthened during the beginning of the month, has fallen sharply in recent weeks in part due to ongoing difficulties surrounding Brexit, but also as the probability of a rate rise has declined. Going forward, assuming that the MPC stands pat next Thursday, economic data will be important in assessing the likelihood of a rate rise at future meetings.