Gilts experienced a choppy September as speculation over the likelihood of a Brexit deal ebbed and flowed in response to political developments. Over September as a whole, however, the yield on the benchmark UK government bond rose from 0.32% to 0.39%, having begun 2019 at 1.26%. Meanwhile, the pound climbed as high as US$1.25 against the US dollar, buoyed by hopes that a Brexit deal might be reached.
- The UK economy contracted by 0.2% QoQ in Q2
- The BoE does not expect the UK to slip into recession this year
- The outlook for the services sector deteriorated
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Gilts experienced a choppy September as speculation over the likelihood of a Brexit deal ebbed and flowed in response to political developments. Over September as a whole, however, the yield on the benchmark UK government bond rose from 0.32% to 0.39%, having begun 2019 at 1.26%. Meanwhile, the pound climbed as high as US$1.25 against the US dollar, buoyed by hopes that a Brexit deal might be reached, before subsiding to end the month at US$1.23.
“Interest rates could move in either direction if the UK leaves the EU without a deal”
As expected, the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) maintained base rate at 0.75% at its September meeting. Although the Bank of England (BoE) does not believe that the UK will slip into recession this year, officials believe that the uncertainties surrounding Brexit will continue to suppress interest rates. Nevertheless, policymakers emphasised that interest rates could move in either direction if the UK leaves the EU without a deal. Later in the month, however, MPC member Martin Saunders said that it was “quite plausible that the next move in Bank Rate would be down rather than up”. Gilt yields fell in response to his comments.
Elsewhere, BoE Governor Mark Carney told the Treasury Select Committee that a no-deal Brexit was likely to prove slightly less damaging to the UK economy than previously predicted, following an intensification of preparations by companies. A no-deal Brexit is now expected to result in an economic contraction of 5.5%, compared with an earlier forecast of -8%. No deal is also expected to push inflation as high as 5.25% and the rate of unemployment to 7%.
The UK economy expanded more strongly than previously calculated during the first quarter of 2019 as Brexit-related stockpiling activity fuelled growth. The economy posted quarterly growth of 0.6% during the period, compared with an earlier estimate of 0.5%. In the second quarter, however, the UK economy contracted at a quarterly rate of 0.2% as businesses ran down their supplies of stockpiled materials. On an annualised basis, the economy posted growth of 1.3% during the second quarter, having grown by 2.1% over the first three months of 2019. Nevertheless, economic growth picked up during the month of July, posting expansion of 0.3%. Although growth was underpinned by activity in the services sector, the Office for National Statistics (ONS) warned: “The underlying picture shows services growth weakening through 2019”.
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