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Investors Expect Volatility In UK Inflation To Persist: BoE

Investors Expect Volatility In UK Inflation To Persist: BoE
9/13/2012 1:00 AM ET

Investors in the U.K. expect inflation to remain more volatile than in the past, at least for the next few years, the latest edition of Quarterly Bulletin published by the Bank of England revealed Thursday.

The report noted that investors' uncertainty about inflation rose substantially during the financial crisis, particularly between three and seven years ahead, and has remained high ever since.

"It is likely that this higher uncertainty reflects investors' beliefs that the volatility in inflation over the past five years will persist for at least the next few years," the report said.

Defending the central bank's monetary policy stance, the report said that without the loosening in monetary policy, the economic downturn would have been far more severe.

Another article in the Bulletin, that explains the developments in UK yield curves, noted that real and nominal UK interest rates have fallen substantially from the start of the crisis, with implied inflation rates relatively unchanged.

The risk premia account for less than a quarter of the fall in nominal yields relative to pre-crisis averages and the falls have been concentrated in short-maturity forwards.

The paper explained that the ten-year spot yields are low because monetary policy is expected to remain loose for longer than in previous easing cycles. "Despite the low level of real yields, the model estimates suggest that inflation expectations have not become less well anchored, with inflation risk premia, if anything, lower than prior to the crisis," it said.

Talking on the distributional effects of asset purchases, the Bulletin noted that the Quantitative Easing pushed up asset prices, in part reversing the large declines in equity prices seen earlier in the financial crisis.

Asset purchases are likely to have had a broadly neutral impact on a fully-funded defined benefit pension scheme and on the value of the annuity income that could be purchased with a personal pension pot. However, some pension schemes have been adversely affected by the direct effects of QE, the report said.

by RTT Staff Writer

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