GBP real swap rates are around minus one percent.
Most of this fall has been due to falling nominal rates rather than falling inflation expectations with similar moves in USD and Euros.
While the Federal Reserve has ended QE the Bank of Japan has increased QE and the ECB may be about to start.
Concerns about inflation in the UK undershooting the Bank of England’s 2% target.
GBP Swap Real Rates Fall to Record Lows
Real GBP swap rates have fallen substantially year to date with even the long end part of the curve now close to minus one percent. This move has been driven primarily by falling nominal rates, with 30 year nominal annual zero rates falling by 108 basis points and 30 year inflation expectations by 23 basis points.
Source: RedAnalytics, ICAP
Real Rates are Also Falling in the Eurozone and the US
The fall in both nominal and real rates is similar to that seen in Euros and US Dollars over the same time period, so the move is unlikely to be solely driven by UK specific factors.
While the recent fall in oil prices might be expected to feed through into reduced inflation expectations, the largest component of the move in nominal rates year to date is a fall in real yields. Falling real yields are also reflecting continued fears of a prolonged period of stagnation in the Eurozone and in the wider global economy.
As the Federal Reserve Ends QE the ECB May Start
This year the Federal Reserve has ended its QE program but the Bank of Japan has increased QE and the ECB is predicted by many market participants to start QE in sovereign bonds next year. Thus far from moving into a period of global monetary tightening we could be moving into a period of further loosening of monetary policy.
Concerns about Inflation in the UK Undershooting 2% Target
Inflation in the UK remains subdued with the Bank of England stating that there is a “significant probability” of CPI falling below 1% within six months which would trigger a letter to the Chancellor. An environment of below target inflation and the growth drag of a stagnant Eurozone make base rate rises before the next election less likely than was predicted at the start of the year.
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