In the services industry (which dominates the UK economy), some restaurant chains have recently announced closures caused by expensive imports and upward pressure on wages due to worker shortages. Inflation remains above the 2% target but is likely to decrease later this year.2 We expect the Bank of England to hike rates in May, but additional hikes in 2018 will likely depend on Brexit discussions and economic performance over the next few months. Gilt yields are likely to continue trending down over the near term.


Neutral. Signs of slowing economic growth and uncertainty over US trade policy continue to limit the ability of the Bank of Canada to tighten monetary policy quickly. Even employment growth, which outperformed in the fourth quarter, has been flat over the last three months. The Canadian 10-year yield peaked at 2.37% in February, and we do not expect it to revisit that level in the near term.3


Neutral. The Reserve Bank of Australia (RBA) held rates steady again at its March meeting and stressed “patience” in its statement. The only notable change was the opinion that the rate of wage growth appears to have troughed. Fourth-quarter GDP was slightly below expectations (due to a decline in exports) but was still relatively strong. Despite a vibrant economy and optimistic business surveys, the RBA remains concerned about the consumer and lack of wage growth. We expect the RBA to remain on hold for the foreseeable future.


Neutral. Government bond yields have risen about 125 basis points since the beginning of August 2017 after several months of upside inflation surprises. However, yields seem to have stabilized after the last two softer inflation reports.4 We expect consumer price inflation to remain firm from April to June before reverting to around 4.5% in the second half of the year.

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The recent banking sector fraud involving Punjab National Bank and several other state-owned banks will likely result in slower credit growth, which could also drag down inflation. We are watching for confirmation of slowing credit growth and softer inflation, which could lead us to move overweight rates.

This article has been republished with permission from Invesco Powershares.