December 2017
UK government bond yields fell during December as demand for gilts rallied. EU leaders declared that, following agreement on key issues – including the future of the Irish border and the UK’s financial liabilities – the UK had made enough progress to allow talks to progress to the next phase, despite the EU Withdrawal Bill’s defeat in the House of Commons.
- Wage growth continued to lag inflation
- The Bank of England believes inflation is close to its peak
- The IMF cut its forecasts for UK economic growth
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UK government bond yields fell over December as a whole as demand for gilts rallied during the month. Investors’ appetite for gilts was underpinned by ongoing political uncertainties. EU leaders declared that, following agreement on key issues – including the future of the Irish border and the UK’s financial liabilities – the UK had made enough progress to allow talks to progress to the next phase. The decision came despite the EU Withdrawal Bill’s defeat in the House of Commons. During December, the yield on the ten-year gilt eased from 1.39% to 1.23%, having begun the year at 1.24%. In comparison, the yield on the short-dated gilt – which matures in 2020 – fell from 0.59% to 0.48% over the month.
“Annualised consumer price inflation rose to 3.1% … climbing to its highest level since March 2012”
Having raised its key rate for the first time in a decade during November, Bank of England (BoE) policymakers maintained the base rate at 0.5% at their December meeting. The BoE believes that sentiment amongst UK businesses and households is likely to be boosted by the advancement of Brexit negotiations, and that the progress achieved during December is likely to reduce the risk of a “disorderly Brexit”.
The central bank still thinks UK inflation is “close to its peak”; annualised consumer price inflation rose to 3.1% during November, climbing to its highest level since March 2012. Prices have been pushed up by higher costs for air travel and computer games and exacerbated by sterling’s weakness. BoE Governor Mark Carney is obliged to write a letter of explanation to the Chancellor of the Exchequer if inflation exceeds or undershoots its 2% target by more than one percentage point. Mr Carney last had to write an explanatory letter to the Chancellor when inflation fell to 0.9% in October 2016.
Average weekly earnings (excluding bonuses) are rising at 2.3% year on year; however, growth in real earnings – which factors in the cost of living – is declining by 0.4%. The rate of unemployment remained at 4.3%, representing its joint-lowest level since 1975.
During December, the International Monetary Fund (IMF) downgraded its forecast for economic growth in the UK, citing the negative impact of Brexit-related uncertainties, the decision of some companies to delay investment plans, and the negative impact of inflation on wages and consumption. The IMF cut its forecast for growth in 2017 from 1.7% to 1.6% and maintained its 2018 prediction at 1.5%.
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