Inflation Report May 2015 Money and asset prices

Chart 1.1 Market prices imply low official interest rates over the next few years International forward interest rates (a) Sources: Bank of England, Bloomberg, European Central Bank (ECB) and Federal Reserve. (a)The February 2015 and May 2015 curves are estimated using instantaneous forward overnight index swap rates in the fifteen working days to 4 February and 7 May respectively. (b)Upper bound of the target range of 0% to 0.25%.

Chart 1.2 Market prices imply a very gradual increase in Bank Rate relative to previous tightening cycles UK Bank Rate tightening cycles (a) Sources: Bank of England, Bloomberg and Bank calculations. (a)Tightening cycles since the start of inflation targeting in Tightening cycles are shown up to when interest rates reach their highest level before they were next reduced. (b)The curve is estimated using instantaneous forward overnight index swap rates in the fifteen working days to 7 May The tightening cycle is defined as starting when instantaneous overnight index swap rates rise above 0.75%, in August The final observation is June 2018 at the end of the forecast period.

Chart 1.3 Falls in many euro-area bond yields have unwound slightly in the run-up to the May Report Ten-year euro-area government bond yields (a) Source: Bloomberg. (a)Yield to maturity on ten-year benchmark government bonds.

Chart 1.4 Equity prices higher, especially in the euro area and Japan International equity prices (a) Source: Thomson Reuters Datastream. (a)In local currency terms, except MSCI Emerging Markets, which is in US dollar terms.

Chart 1.5 Moves in sterling since mid-2014 have been small relative to those in the euro and US dollar Effective exchange rates

Chart 1.6 Long-term interest rates remain unusually low International ten-year government bond yields (a) Sources: Bloomberg and Bank calculations. (a)Zero-coupon yields on ten-year benchmark government bonds. (b)An estimate based on French and German government bonds.

Chart 1.7 Term premia on UK and US government bonds have fallen over the past six months Estimates of contributions to the change in ten-year government bond yields between end-October 2014 and end-April 2015 (a)(b) Sources: Bloomberg, Federal Reserve Bank of New York and Bank calculations. (a)Total change in monthly model-fitted values of nominal yields. UK estimates are derived using the model described in Malik, S and Meldrum, A (2014), ‘Evaluating the robustness of UK term structure decompositions using linear regression methods’, Bank of England Working Paper No. 518; US estimates are available from (b)Change between 31 October 2014 and 30 April 2015.

Chart 1.8 Spreads on bank funding remain low UK banks’ indicative longer-term funding spreads Sources: Bank of England, Bloomberg, Markit Group Limited and Bank calculations. (a)Constant-maturity unweighted average of secondary market spreads to swaps for the major UK lenders’ five-year euro senior unsecured bonds or a suitable proxy. (b)Spreads for sterling fixed-rate retail bonds over equivalent-maturity swaps. (c)Unweighted average of the five-year senior CDS premia for the major UK lenders. (d)Constant-maturity unweighted average of secondary market spreads to swaps for the major UK lenders’ five-year euro-denominated covered bonds or a suitable proxy.

Chart 1.9 Banks’ funding has become more deposit-based Customer funding gap (a) (a)Calculated as the difference between bank lending to households and private non-financial corporations and deposits received from them.

Chart 1.10 Broad money growth has been stable Sectoral broad money (a) (a)Monthly data unless otherwise specified. (b)Quarterly data prior to June 2010 and monthly thereafter. Intermediate other financial corporations (OFCs) are: mortgage and housing credit corporations; non-bank credit grantors; bank holding companies; securitisation special purpose vehicles; other activities auxiliary to financial intermediation; and ‘other financial intermediaries’ belonging to the same financial group. (c)Quarterly data prior to June 2010 and monthly thereafter. M4 excluding intermediate OFCs.

Chart 1.11 Household interest rates are at low levels Average quoted household interest rates (a) (a)Sterling-only end-month average quoted rates. The Bank’s quoted rates series are weighted averages of rates from a sample of banks and building societies with products meeting the specific criteria (see Data are non seasonally adjusted. (b)On mortgages with a loan to value ratio of 75%.

Chart 1.12 Housing market activity has been broadly stable over the past few months Mortgage approvals and housing transactions Sources: Bank of England and HM Revenue and Customs. (a)Number of residential property transactions for values of £40,000 or above.

Chart 1.13 Banks report a fall in demand for mortgages since mid-2014 Credit Conditions Survey: household secured credit demand and availability (a) (a)Weighted response of lenders. A positive (negative) balance indicates that more (less) household secured credit was available or demanded to finance a house purchase over the previous three months.

Chart 1.14 PNFC loan growth picked up in Q1 Growth in the stock of lending to the UK real estate sector and other businesses (a)(b) (a)Lending by UK monetary financial institutions. Rates of growth in the stock of lending. Non seasonally adjusted. For details on the series included in the swathes see tab ‘Chart 1.1 appendix’ at (b)Data are quarterly until 2012 and monthly thereafter. (c)From 2011, data are on the SIC 2007 basis. Changes in SIC codes have led to some components moving between industries, which may affect growth rates in 2011.

Tables

Table 1.A Monitoring the MPC’s key judgements

Table 1.B Government bond yields have fallen in most euro-area countries over the past six months Ten-year euro-area government bond yields (a) Sources: Bloomberg and Bank calculations. (a)Yield to maturity on ten-year benchmark government bonds. (b)Bloomberg data on Irish ten-year yields are not available between early October 2011 and mid-March (c)Average of the fifteen working days to 5 November (d)Average of the fifteen working days to 7 May 2015.

Table 1.C Companies continued to raise net external finance Net external finance raised by PNFCs (a) (a)Includes sterling and foreign currency funds. (b)Non seasonally adjusted. (c)Includes stand-alone and programme bonds. (d)As component series are not all seasonally adjusted, the total may not equal the sum of its components. (e)Sterling net lending excluding the effects of securitisations. Percentage change on a quarter earlier.