August 2018
Gilt yields declined during most of August, but rallied towards the end of the month amid speculation that BoE Governor Mark Carney might be requested to stay on beyond the end his term as Governor to help facilitate oversee the post-Brexit transition. Chancellor of the Exchequer Philip Hammond warned that a no-deal Brexit could cut the UK’s economic growth by 7.7% over 15 years.
- The annualised rate of consumer price inflation rose to 2.5% during July
- The Bank of England raised UK base rate to 0.75%
- Credit ratings agency Fitch warned about the economic consequences of a no-deal Brexit
To view the series of market updates through August, click here
Gilt yields declined during most of August, but rallied towards the end of the month amid speculation that Governor of the Bank of England (BoE) Mark Carney might be requested to stay on beyond the end his term as Governor to help facilitate oversee the post-Brexit transition. Over August as a whole, the yield on the benchmark government bond fell from 1.39% to 1.31%, while the yield on the short-dated gilt – which matures in 2021 – eased from 0.83% to 0.80%. Brexit-related concerns prompted foreign investors to sell £17.15 billion-worth of UK gilt holdings during July, representing the single largest monthly outflow since 1982.
“Brexit-related concerns prompted foreign investors to sell £17.15 billion-worth of UK gilt holdings during July”
Chancellor of the Exchequer Philip Hammond warned that a no-deal Brexit could cut the UK’s economic growth by 7.7% over 15 years; meanwhile, Mark Carney said: “Negotiations are now entering a critical period, with the UK and EU both seeking an agreement by the end of the year.” He went on to say: “Although the range of potential outcomes is wide, what matters for monetary policy is how people react to developments”.
Credit ratings agency Fitch said that that an “acrimonious and disruptive no-deal Brexit is a material and growing possibility”, warning that a disorderly Brexit might “substantially reduce” forecasts for UK economic growth, inflation and unemployment. Elsewhere, Business Secretary Greg Clark urged the European Commission to “respond positively and constructively” to the Chequers white paper, cautioning: “if not, the disruption and impact on our continent … will be significant and lasting”.
Having grown by 0.2% during the first three months of 2018, the UK’s economy expanded by 0.4% during the second quarter, boosted by a stronger contribution from the construction and services sectors. The BoE’s Monetary Policy Committee (MPC) warned that “the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal”.
BoE policymakers increased base rate from 0.5% to 0.75%; further “limited” increases are expected at a “gradual” pace. The annualised rate of consumer price inflation rose to 2.5% during July, having remained at 2.4% for three straight months. This was the first rise in the cost of living since November 2017 and it was stoked by higher prices for computer games and transport fares. In comparison, average earnings (excluding bonuses) rose at an annualised rate of 2.7%.
A version of this and other market briefings are available to use in our newsletter builder feature. Click here
