Despite a rally in the value of the pound, UK government bonds experienced a drop in demand during January, sending yields sharply higher. Sentiment towards gilts deteriorated against a backdrop of tightening monetary policy and ongoing concerns over the outlook for Brexit.
- The UK economy grew by 1.8% in 2017
- Concerns remained over Brexit negotiations
- Manufacturing activity continued to pick up
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Despite a rally in the value of the pound, UK government bonds experienced a drop in demand during January, sending yields sharply higher. Sentiment towards gilts deteriorated against a backdrop of tightening monetary policy and ongoing concerns over the outlook for Brexit. Over January, the yield on the benchmark UK government bond rose from 1.23% to 1.49%. In comparison, the yield on the short-dated gilt – which matures in 2020 – surged from 0.48% to 0.72% over the month.
“The UK’s annualised rate of inflation eased during December”
The UK economy expanded by 1.8% in 2017, compared with growth of 1.9% in 2016. However, the economy expanded more strongly than expected over the final three months of 2017, posting quarterly growth of 0.5% and boosted by a robust contribution from the services and manufacturing sectors. Manufacturing activity notched up its seventh straight month of growth during November, posting its most rapid rate of expansion since the first quarter of 2008.
During the month, the Confederation of British Industry (CBI) highlighted the continued uncertainty pervading the negotiations about the future trading relationship between the UK and the EU. The CBI called for the Government to reach a transitional trade agreement by April and to achieve a deal on trade terms by October, and urged the Government to remain in the customs union “for as long as it serves us to do so”, but did not rule out the possibility that, in future, the ability to “fully set independent trade policies” might outweigh the value of a customs union with the EU.
The rate of unemployment remained at 4.3% during the three months to November, representing its lowest level since 1975. Although annualised growth in average earnings (excluding bonuses) picked up slightly to 2.4%, it remained firmly below the rate of inflation. Meanwhile, real earnings growth fell by 0.5% year on year.
The UK’s annualised rate of inflation eased during December from 3.1% to 3%, posting its first decline since June 2017 and reducing pressure on the Bank of England (BoE) to implement another increase in interest rates. Inflationary pressures were dampened by a fall in the price of toys and games and by a smaller increase in the cost of air travel than in the same period of 2016. The BoE believes inflation is likely to be close to its peak, and will subside to its 2% target in 2018.
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