LONDON (MNI) – The fears of some Bank of England Monetary Policy
Committee members that elevated inflation would feed through to sharply
higher inflation expectations may not have been realised, but market
participants do think inflation will remain more volatile.
While inflation expectations may not have become de-anchored from
the 2.0% inflation target, market participants appear to have lost faith
in the MPC’s ability to keep inflation stable. The BOE research also
finds the MPC is expected to leave policy loose for longer.
A Bank of England research piece, based on option-implied inflation
distributions, finds that the volatility of inflation in the post
financial crisis world is expected to be greater, although the level of
inflation is not expected to be higher.
The paper, published in the BOE’s Quarterly Bulletin, looks at the
growing market for inflation options and finds that “uncertainty around
inflation has risen substantially since 2008 at all maturities.”
“That does not necessarily mean that central inflation expectations
have become less well anchored. Indeed, the mean of the distributions
has been relatively stable over time,” it says.
“Much of the increase in uncertainty seems likely to reflect
investors’ beliefs that the volatility in inflation seen since the
financial crisis will persist for at least the next few years,” the
paper says.
Another Quarterly Bulletin research paper looks at the fall in UK
government bond yields and seeks to find why it has happened.
It says that while real and nominal UK interest rates have fallen
substantially since the onset of the financial crisis “implied inflation
rates (have been) relatively unchanged.”
Risk premia account for less than a quarter of the fall in nominal
yields and “the most likely explanation is that 10-year spot yields are
low because monetary policy is expected to remain loose for longer than
in previous easing cycles.”
–London bureau: 44 20 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]