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What's going on?

The Bank of England (BoE) laid the foundations for a slow and steady return to more normal interest rates at its latest meeting on Thursday.

What does this mean?

The BoE left its interest rates and bond-buying program where they were, but it did make a change to its inflation forecast: the central bank now sees inflation topping out at around 4% in late 2021, up from 2.5% now. That would represent the fastest price rise in a decade, and twice the BoE’s target.

So to head off the threat of runaway prices, the BoE warned investors to expect some “modest tightening” of the policies it’s had in place since the pandemic first laid foot on UK soil. It’s all relative, though: the BoE thinks it’ll be another three years before interest rates hit 0.5%.

Why should I care?

For markets: Why so negative?
Plenty of central banks are starting to hint at higher interest rates to come, but bond investors seem determined to ignore them for now. See, yields have been tumbling since spring, which has pushed the global value of negative-yielding debt to nearly $17 trillion. That’s up from $12 trillion in May, which suggests one of two things: either investors have still been flocking to the safety of bonds because they don’t think economies are really on the mend, or central banks’ have been so gung-ho with their bond-buying that they’ve pushed everyone else out of the market. That would make it a lot harder to use bond yields as a proxy for investors’ economic expectations.

The bigger picture: Stock investors say relax.
Stock valuations are more likely to hold up if bond yields stay low, and the recent set of better-than-expected US company earnings should help prop up prices too. Goldman Sachs certainly seems to think so: the investment bank cited both those reasons when it lifted its end-of-year target for the US stock market by 9% on Thursday.

Originally posted as part of the Finimize daily email.

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