Here’s an interest rate calendar for the economies of the developed world that you can put up on your office wall—but it is subject to revision. (I know it’s shocking but markets do get this stuff wrong from time to time.)
Right now the futures markets are priced for expectations that the United Kingdom will start raising short-term interest rates, now at a low 0.5%, in June. By the end of 2011, the markets say, the Bank of England will have raised short-term rates to 1.25%.
The European Central Bank will go next with its first rate increase expected in September. Short-term rates, now at 1.0%, will be at 1.5% by the end of 2011.
Last up will be the United States, which, the markets now say, won’t move until December. The Fed funds rate, now at an effective 0.13%, will climb to 0.5% by the end of 2011.
The driver in all this isn’t a rapid rise in inflation expectations, but expectations for a gradual return to normal economic times.
Of three major developed economies, bond investors are expecting only the United Kingdom to show a higher inflation rate over the next ten years now than they were expecting a year ago.
According to the Financial Times, calculating from the difference in yields paid by inflation-protected bonds such as U.S. TIPS and conventional bonds, markets project that expectations for the annual rate of inflation in the United Kingdom over the next ten years—got what we’re measuring here?—have gone from expectations for a 2.9% average annual rate for the next 10-year period in January 2010 to expectations for a 3.3% rate now.
The comparable figures for Germany are expectations for an average 2.0% inflation rate over the next ten years in January 2010 to—big surprise here—2.0% now. In other words no change in expectations for German inflation.
In the U.S. expectations in January 2010 were for an average rate of 2.4% and now for a 2.3% inflation rate.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of any stock mentioned in this post as of the end of December. (I will have the January portfolio holdings posted this week.) For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/