While there is little to suggest central banks globally are coordinating their policies, members of the MPC have been making hawkish remarks about monetary policy at the same time as similar rhetoric from rate setters at the European Central Bank (ECB).
It is unlikely the Bank will embark on a major rate-hiking cycle. On 4 July, UK Asset Resolution, the state-owned group responsible for winding down the mortgage books of failed lenders Northern Rock and Bradford & Bingley, warned that up to 10 per cent of its customers could struggle if interest rates rose by one percentage point. Such a rise would potentially hit the consumer and the economy quite hard, particularly as lenders are already tightening their credit criteria or restricting loans following pressure from the Bank of England.
A significant rate-hiking cycle could have a severe impact given all the unknowns over the next two years and more. Such a development would be wholly inappropriate.
The market has priced in at least one rate hike over the next year, and is also saying there is a 68 per cent chance of a hike over the next six months. Mr McCafferty called for two hikes over the next two years, and the market has already priced in a significant amount of that.
A rate hike would be unlikely to have a major impact on the fixed income sector, although the timing of such a move could be a factor. The market is not expecting interest rates to rise in August. If they were to rise, the market would digest the news fairly easily.
The market is pricing in a rate hike in the second half of the next 12 months, but a move is far from clear given the economic uncertainty.
Gilt investors sold bonds after the unexpectedly close vote by the MPC in June, and the yield on the 10-year benchmark has since been rising steadily since. Inflation data and hawkish comments from rate-setting members of the MPC played a part.
Yet the recent rise in yields is not confined to the UK. Ten-year German bund yields, and most other euro zone sovereign debt yields, along with US treasuries, have also been moving upwards as investors refocus on the outlook for global central bank policy.
Ed Hutchings is UK sovereign portfolio manager at Aviva Investors
