British Retail Investors Are Betting The BoE Is Wrong

Includes: EWU, FXB, GBB
by: Dorsey Wright Money Management

The market for inflation expectations used to be alive and well in the UK. According to The Source, that changed for a strange reason:

After just a few months, the U.K. government’s savings arm has stopped selling its inflation-protected savings certificates to retail investors.

Not because it was doing badly. But because it was too successful.

In the four months since they were reintroduced, the certificates, which pay 0.5 percentage points above the rate of retail price inflation, have been wildly popular. Half a million individual certificates were bought in that time. It seems sales were ended because retail banks complained that they were having trouble raising funds from the market, as huge volumes of money flowed to the savings certificates instead.

The Bank of England, like the Fed until recently, has been engaged in quantitative easing. The bank now owns 25% of the gilts (UK government bonds) outstanding! After injecting all of that money into the system, the BOE is still expecting subdued inflation. Based on the demand for inflation protection from the private market, retail investors are betting the BOE is wrong.

We’ll just have to see who ends up on the right side of this trade over time, but betting markets expressing supply and demand are usually more accurate than policy makers.