Are Markets predicting a rate rise in August 2012?

The UK money market is pricing in a first UK interest rate hike for August 2012, says Mike Riddell, the manager of the M&G international sovereign bond fund.

Back in January the money market was pricing in three rate hikes of 0.25 per cent in 2011 alone, with the first fully priced in for June.

“Earlier this year the market was almost pricing in five rate hikes, now it’s just one,” says Riddell. “Anyone who’s been betting on a gilt sell-off or rate hikes will be in a world of pain.”

Riddell notes that the pound sterling is now the weakest currency in the world today, while 10-year gilts yields have rallied seven basis points to 3.1 per cent, the lowest yield in seven months.

“The trigger was the minutes from the last Monetary Policy Committee meeting, where the crucial sentences were ’current weakness of demand growth to persist for longer than previously thought’ and ’further asset purchases might become warranted if the downside risks to medium-term inflation materialised’,” he says.