Calm markets make eyebrows twitch

Note: This section contains information in English only.
Source: Dukascopy Bank SA
"Our industrial base is seizing a bigger role in the UK's economic recovery, with output, orders and hiring all on the up"
- Katja Hall, CBI chief policy director


The U.K. economy is building up steam, data showed this week, as the central bank revised its growth outlook for the second time. The economy is now expected to expand 1% in the first quarter, from 0.9% last month and 0.8% in February's Inflation report. The central bank also noted that the output has grown consistently across all sectors of the economy. Despite bright outlook markets reacted in a very modest way.

It is not quite a twitch of Mark Carney's eyebrows, however, when the central bank claims it is surprised that markets are so calm, they really mean investors are overly optimistic. Policymakers have already expressed their concerns that demand for insurance against near-term rate increases is subdued. A gauge of the cost of options to hedge against rate rises, or the 1-year implied volatility on short Pound futures, stood at the lowest level since Lehman collapse 6 years ago. Despite the fact the economy is heating up, investors are not panicking. Earlier this year Carney stressed out that volatility will remain low, as evidence that his forward guidance works. While the 7% unemployment has already been breached, Carney remains dovish as ever. It seems that Carney is telling investors to prepare for an earlier rate hike. At the same time, he can be concerned that too much certainty will make it harder to change course in case inflation picks up faster than expected.
© Dukascopy Bank SA

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