mpc.theyserveforyou.com

mpc: 11

VII Market intelligence

A52 Near-term expectations for the Bank's repo rate out to the end of 2001, derived from sterling money market instruments, had ended the period broadly unchanged from their position on 4 April. In the first half of the month, interest rate expectations had increased in response to the stronger-than-expected average earnings data for February and rising equity prices. However, these effects had then been largely reversed after Easter following the FOMC's unexpected 50 basis point reduction in the Federal funds target rate, weaker-than-expected UK retail sales and GDP data. After allowing for these offsetting influences, forward rates derived from sterling money market instruments had continued to suggest a strong expectation that the MPC would reduce the Bank's official repo rate by 25 basis points at its May meeting. Similarly, economists polled by Reuters on 3 May had attached a 70% mean probability to a reduction in the Bank repo rate on 10 May. A53 In contrast, interest rate expectations for 2002 and 2003 had increased by around 20-25 basis points over the month. Market commentators noted that this development had largely reflected somewhat less pessimistic assessments about the outlook for US and UK growth in 2002 and beyond. The divergent performances of near-term interest rate expectations, on the one hand, and expectations for 2002 and 2003 on the other, had begun around mid-March and had coincided with a more general rise in equity markets and government bond yields in the United States, the euro area and the United Kingdom. Factors that had been cited by market participants to explain this change in sentiment had included the unexpected resilience of consumption and housing market activity in the United States, some better-than-feared corporate results in both the United States and Europe, and the FOMC's actions to reduce the Federal funds target rate by 2 percentage points since the start of the year. A54 The sterling ERI had been broadly stable since the Committee's previous meeting, rising by 0.5% to 105.5. Movements in sterling during April had largely been driven by developments in the euro area and the United States, rather than by domestic considerations. Market participants had noted a few signs from risk reversal statistics, market positioning data and surveys of market participants' attitudes that sentiment towards the euro might have improved over the month. However, most market-makers had remained uncertain about the strength of this evidence and had continued to recommend to their clients that they maintain neutral short-term positions in the euro. Nevertheless, looking further ahead, most market commentators continued to believe that the dollar would depreciate against the euro and that, as a consequence, sterling would also depreciate against the euro.