Inflation Report May 2019 Section 1 Global developments and domestic financial conditions 3 Table 1.B Monitoring the MPC's key judgements February, and is now expected to reach around 1.0% in three Developments anticipated in February Developments now anticipated during years'time( Chart 1.4). Longer-term UK interest rates are also during 2019 Q1-2019 Q3 2019Q2-2019Q4 lower: the yield on 10-year UK government bonds has declined Advanced economies Revised up slightly to 1.2%from 1.3%. Combined with the moves in the run-up to artery euro-area GDP growth to artery euro-area GDP growth to the February Report, both short and long-term interest rates verage a little above y% have fallen by around 40 basis points since November verage v% badly unchanged The sterling ERI has been sensitive to Brexit developments It Indicators of activity consistent with has appreciated by 1v2% since the February Report, which market contacts attribute to a lower probability being GDP growth in China 4 % within that, GDP growth in China verage around 6%. attached to a no-deal Brexit. The sterling ERI remains around The exchange rate and commodity prices Revised up 15% below its November 2015 peak( Chart 1.8) Ling ERI .US dollar oil prices are 18% higher. The sterling ERI is% higher Commodity Following the extension to the negotiation period for the with the conditioning assumptions UK's withdrawal from the EU, sterling implied volatilities set out in this Report. an indicator of uncertainty around the outlook for the Cost of cre Mortgage spreads to widen a little. exchange rate-fell sharply and the cost of insuring against a Mortgage spreads to widen a little Large depreciation relative to a large appreciation also fell,as Chart 1.5 Equity prices have risen since February market participants appear to be pricing in a lower probability Equity prices in advanced economies and emerging markets a) of a sharp fall in sterling over the next six months. Indices 4 January 2016=100 Credit conditions facing companies and households Over the past few years, credit conditions facing companie have been relatively accommodative. However, conditions corporate bond markets-which large companies use to borrow-deteriorated at the end of 2018. Bond spreads across the main markets in which UK companies borrow dices 4 January 2016=100 widened markedly(Chart 1. 6). These spreads have since narrowed, driven by the same factors that eased financial conditions globally(Section 1.1). UK corporate bond issuance has resumed, although it remained below its historical average in 2019 Q1 with most issuance concentrated among investment-grade companies According to the Credit Conditions Survey, the availability of () The Msa Inc declaimer of liability, which applies to the data provided, is avaRable here bank credit to companies has been little changed in recent quarters. However, reports from the Banks Agents suggest Chart 1.6 Corporate bond spreads have narrowed that the availability of credit has tightened for sectors that International non-financial corporate bond spreads(a) may be more exposed to Brexit, such as export-focused firms Investment-grade(E) ( eft-hand sca High-yield (E)(right-hand scale) Investment-grade(UsS)(left-hand scale) High-yield(USS)(right-hand scale) Investment-grade(Eceft-hand scale) High-yield (e (right-hand scale) The Credit Conditions Survey indicates that the demand for entage points corporate credit has remained subdued. Respondents to th Survey did, however, report an increase in the demand for inventory finance in Q1 and almost two thirds of respondents to the Lloyds Business Barometer survey in March reported that they were prepared for Brexit-related pressures on working capital. Supervisory intelligence suggests that, as yet, the banks accounting for the majority of lending to corporates have not reduced their willingness to provide working capital finance. The y of respondents to the Agents survey also reported no change in the availability and cost of Sourees Eikon from Refiniti. ICE/BoAML Global Research and Bank calculations working capital or trade finance in the past three monthsInflation Report May 2019 Section 1 Global developments and domestic financial conditions 3 February, and is now expected to reach around 1.0% in three years’ time (Chart 1.4). Longer-term UK interest rates are also lower: the yield on 10-year UK government bonds has declined to 1.2% from 1.3%. Combined with the moves in the run-up to the February Report, both short and long-term interest rates have fallen by around 40 basis points since November. The sterling ERI has been sensitive to Brexit developments. It has appreciated by 1½% since the February Report, which market contacts attribute to a lower probability being attached to a no-deal Brexit. The sterling ERI remains around 15% below its November 2015 peak (Chart 1.8). Following the extension to the negotiation period for the UK’s withdrawal from the EU, sterling implied volatilities — an indicator of uncertainty around the outlook for the exchange rate — fell sharply. And the cost of insuring against a large depreciation relative to a large appreciation also fell, as market participants appear to be pricing in a lower probability of a sharp fall in sterling over the next six months. Credit conditions facing companies and households Over the past few years, credit conditions facing companies have been relatively accommodative. However, conditions in corporate bond markets — which large companies use to borrow — deteriorated at the end of 2018. Bond spreads across the main markets in which UK companies borrow widened markedly (Chart 1.6). These spreads have since narrowed, driven by the same factors that eased financial conditions globally (Section 1.1). UK corporate bond issuance has resumed, although it remained below its historical average in 2019 Q1 with most issuance concentrated among investment-grade companies. According to the Credit Conditions Survey, the availability of bank credit to companies has been little changed in recent quarters. However, reports from the Bank’s Agents suggest that the availability of credit has tightened for sectors that may be more exposed to Brexit, such as export-focused firms. The Credit Conditions Survey indicates that the demand for corporate credit has remained subdued. Respondents to the Survey did, however, report an increase in the demand for inventory finance in Q1 and almost two thirds of respondents to the Lloyds Business Barometer survey in March reported that they were prepared for Brexit-related pressures on working capital. Supervisory intelligence suggests that, as yet, the banks accounting for the majority of lending to corporates have not reduced their willingness to provide working capital finance. The majority of respondents to the Agents’ recent survey also reported no change in the availability and cost of working capital or trade finance in the past three months (Box 5). Developments anticipated in February during 2019 Q1–2019 Q3 Developments now anticipated during 2019 Q2–2019 Q4 Advanced economies Revised up slightly • Quarterly euro-area GDP growth to average ¼%. • Quarterly US GDP growth to average ½%. • Quarterly euro-area GDP growth to average a little above ¼%. • Quarterly US GDP growth to average ½%. Rest of the world Broadly unchanged • Indicators of activity consistent with four-quarter PPP-weighted emerging market economy growth of around 4¼%; within that, GDP growth in China to average around 6%. • Indicators of activity consistent with four-quarter PPP-weighted emerging market economy growth of around 4¼%; within that, GDP growth in China to average around 6%. The exchange rate and commodity prices Revised up • Commodity prices and the sterling ERI to evolve in line with the conditioning assumptions set out in this Report. • US dollar oil prices are 18% higher. The sterling ERI is 1.5% higher. Commodity prices and the sterling ERI to evolve in line with the conditioning assumptions set out in this Report. Cost of credit Broadly unchanged • Mortgage spreads to widen a little. • Mortgage spreads to widen a little. Table 1.B Monitoring the MPC’s key judgements 0 1 2 3 4 5 0 2 4 6 8 10 2016 17 18 19 February Report Percentage points Percentage points High-yield (US$) (right-hand scale) High-yield (€) (right-hand scale) High-yield (£) (right-hand scale) Investment-grade (US$) (left-hand scale) Investment-grade (£) (left-hand scale) Investment-grade (€) (left-hand scale) Chart 1.6 Corporate bond spreads have narrowed International non-financial corporate bond spreads(a) Sources: Eikon from Refinitiv, ICE/BoAML Global Research and Bank calculations. (a) Option-adjusted spreads on government bond yields. Investment-grade corporate bond yields are calculated using an index of bonds with a rating of BBB3 or above. High-yield corporate bond yields are calculated using aggregate indices of bonds rated lower than BBB3. Due to monthly index rebalancing, movements in yields at the end of each month might reflect changes in the population of securities within the indices. 70 80 90 100 110 120 130 140 150 160 170 2016 17 18 19 Indices: 4 January 2016 = 100 S&P 500 Euro Stoxx FTSE All-Share February Report Chart 1.5 Equity prices have risen since February Equity prices in advanced economies and emerging markets(a) Sources: Eikon from Refinitiv, MSCI and Bank calculations. (a) In local currency terms, except for MSCI Emerging Markets which is in US dollar terms. (b) The MSCI Inc. disclaimer of liability, which applies to the data provided, is available here. 70 80 90 100 110 120 130 140 150 160 170 2016 17 18 19 Indices: 4 January 2016 = 100 MSCI Emerging Markets(b) Shanghai Composite February Report