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Gilt yields continued their rise in February

February 2018

Having risen strongly during January, gilt yields continued their upward journey in February. Demand for government bonds was curbed by speculation that interest rates – in the UK and in the US – might increase more rapidly than previously anticipated; equity markets also experienced heavy falls during the month. 

  • Annualised CPI remained at 3% in January
  • Productivity continued to improve
  • The UK economy expanded by 1.7% in 2017

To view the series of market updates through February, click here


Having risen strongly during January, gilt yields continued their upward journey in February. Demand for government bonds was curbed by speculation that interest rates – in the UK and in the US – might increase more rapidly than previously anticipated; equity markets also experienced heavy falls during the month. 

“Policymakers’ readiness to accept above-target inflation appears to be on the wane”

Over February as a whole, the yield on the benchmark UK government bond rose from 1.49% to 1.59%. In comparison, the yield on the short-dated gilt – which matures in 2020 – increased from 0.72% to 0.83%.

Interest rates might have to rise sooner and more strongly than previously expected, boosted by the strengthening global economy, according to the Bank of England’s (BoE’s) quarterly inflation report. Policymakers’ readiness to accept above-target inflation appears to be on the wane. The UK’s annualised rate of inflation – as measured by the Consumer Prices Index (CPI) – remained at 3% in January. Elsewhere, the official rate of consumer price inflation – CPIH, which includes owner occupiers’ housing costs – stayed at 2.7%. According to the Office for National Statistics (ONS), food price inflation appears to be moderating.

In a letter to the Chancellor of the Exchequer, BoE Governor Mark Carney said: “Monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report”. His comments stoked expectations that the central bank is preparing investors for the possibility that interest rates could rise as early as May. 

The BoE expects wages and productivity growth to pick up. Productivity grew for a second consecutive quarter over the final three months of 2017. Output per hour rose by 0.8% during the period, having climbed by 0.9% in the third quarter. According to the ONS, productivity growth during the second half of 2017 was stronger than any two consecutive quarters since the economic downturn. 

The UK economy grew by 1.7% during 2017, compared with an earlier estimate of 1.8%. Over 2017, household spending slowed to its slowest rate since 2012. Looking ahead, however, The BoE raised its forecast for UK economic growth in 2017 from 1.7% to 1.8%, citing the positive impact of an increasingly robust global economy that is likely to stoke demand for UK exports. The central bank warned that Brexit “remains the most significant influence on, and source of uncertainty about, the economic outlook”.

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