ECONOMIC DATA ANALYSIS BY LLOYDS TSB

Fixed income markets endured another bruising week last week in the wake of a drop in US unemployment, sharp jumps in global PMIs and unsettling comments from Fed Chairman Bernanke over the outlook for the US fiscal deficit.

King’s speech fails to calm UK rate fears

Fixed income markets endured another bruising week last week in the wake of a drop in US unemployment, sharp jumps in global PMIs and unsettling comments from Fed Chairman Bernanke over the outlook for the US fiscal deficit. We expect Bernanke to return to this topic this week in testimony to the House Budget Committee. Otherwise, international economic news is thin on the ground, which will keep investors focused on the evolving situation in Egypt. From a domestic perspective, our main focus is Thursday’s MPC announcement.

A gradual ratcheting of interest rate expectations has left SONIA money market rates fully anticipating the first 0.25% hike in Bank Rate in May and go a long way to pricing another two subsequent increases by year-end. So is there any chance of a change in policy this week? We acknowledge the risks posed by an increase in headline inflation on the medium-term outlook (via second round wage effects) have risen, something clearly documented in recent meetings. And the fact that the last meeting saw two members (Sentance and Weale) vote for a hike and some members describing a “finely balanced” decision. Nevertheless, we think there is a very remote chance of a change this week.

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