August 2017
During August, investors’ appetite for risk deteriorated, undermined by further deterioration in relations between North Korea and the rest of the world. As a result, demand for UK government bonds rose, sending yields lower. During the month, BoE Governor Mark Carney warned that uncertainties over Brexit are dampening the UK’s economic expansion, business investment and wage growth.
- Inflation continued to outstrip wage growth
- Consumer borrowing has risen
- Unemployment fell to its lowest level since 1975
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During August, investors’ appetite for risk weakened, undermined by further deterioration in relations between North Korea and the rest of the world. Investor sentiment was further rattled towards the end of the month as North Korea fired a missile over Japan. Confidence received an additional blow from a damaging tropical storm that hammered Texas and the US Gulf Coast. As a result, demand for UK government bonds rose, sending yields lower. Over August as a whole, the yield on the ten-year gilt fell from 1.29% to 1.09%, while the short-dated gilt yield declined from 0.27% to 0.18% .
“UK base rate has remained at 0.25% for twelve months; rates have not risen for ten years”
During the month, Bank of England (BoE) Governor Mark Carney warned that Brexit-related uncertainties are dampening economic expansion, business investment and wage growth. The BoE trimmed its economic growth forecasts from 1.9% to 1.7% this year, and from 1.7% to 1.6% next year.
The UK’s annualised rate of inflation held steady at 2.6% in July, but continued to outstrip wage growth: average earnings (excluding bonuses) rose at an annualised rate of 2.1% during three months to June, and real earnings declined by 0.5%.
The rate of unemployment fell to 4.4% during the second quarter, representing its lowest level since 1975. Although the unemployment rate has continued to decline, a rise in the labour supply has helped to suppress wage growth, according to a survey undertaken by the Chartered Institute of Personnel and Development (CIPD) and Adecco Group.
Looking ahead, the BoE expects wages to rise by only 2% this year and 3% next year. Consumer borrowing has risen as households seek to address the effects of rising inflation and lacklustre wage growth. The UK base rate has remained at 0.25% for twelve months; rates have not risen for ten years, and the Monetary Policy Committee (MPC) voted by six to two at its August meeting in favour of maintaining its current stance.
One of the two MPC members to vote in favour of a rate increase, Michael Saunders , gave a speech at the end of August in which he provided some rationale for tightening interest rates. In particular, he commented: “In my view, there are considerable advantages to acting early enough to allow a gradual rise in interest rates… It would be preferable to have the space to move gradually…If we get behind the curve, we lose that space.”
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