The last year has been characterised by large moves in exchange rates and falls in risky asset prices but the repricing of government bonds and of expectations for monetary policy have been particularly striking. Significant UK specific factors emerged in September and October, which have been covered in detail elsewhere12. The UK policy premia which opened up have now disappeared. The cumulative increase in yields on UK 10 gilts over the last year is now very closely in line with the change in US and German 10 year bonds (Chart 7). Having peaked at 4.6% in late September yields on 10 year gilts were back down at 3.2% at close yesterday, their level at the start of September. Source: Bloomberg L.P., and Bank calculations Notes: The path for Bank Rate implied by forward market interest rates are based on overnight index swap rates. Latest yield curve refers to forward market interest rates at cob 21 November 2021. UK fiscal policy developments in response to the energy price shock have been a key contributor to the outlook for inflation. In early September the Government announced an Energy Price Guarantee (EPG) for households (and a business equivalent) to cap average energy bills at £ up until April 2023. In the Autumn Statement on 17 November, the Government announced an increase in the cap to £ for the year to April 2024.
15  Chart 6: MPC has managed the trade-off  16  3.0 November 2016  Inflation (%)  February 2017 2.5  August 2016 May 2017 August 2017 -1.5  -1.0 August 2016, no stimulus  November 2017 February 2018  -0.5  Excess demand (%)  May 2018  2.0 0.0  0.5  1.0  1.5  Preferred trade-off if λ=0.1  1.5  Preferred trade-off if λ=1 1.0  Since then, the Committee has managed policy to diminish steadily the trade-off, increasing employment, using up the expected degree of spare capacity in the economy, and reducing the expected overshoot of the inflation target. Throughout this period, inflation expectations have remained well anchored,  17  the volatility of interest rates  very low, and financial conditions highly supportive. Over the course of 2017, the steady absorption of slack and the prospect of moving into excess demand by Year 3 – evident in the dots showing the successive Inflation Report projections in Chart 6 – reduced the degree to which it was appropriate to accommodate an extended period of inflation above the target. As a consequence, the MPC began to remove some of the stimulus policy had been providing raising Bank Rate to ½ percent last November (the pink dot in Chart 7). 15  Calculations at the time suggested that returning inflation to target at a conventional horizon could have cost ¼ million jobs and widened the output gap to 1½%.