July 2008
Gilt yields rose and gilt prices fell during July amid expectations that the Bank of England (BoE) would increase its key interest rate at the Monetary Policy Committee’s (MPC’s) August meeting. Elsewhere, the pound fell below US$1.30 for the first time since September last year during July as disappointing retail sales data triggered concerns that inflationary pressures are starting to falter.
- CPI inflation remained at 2.4% YoY in June
- The BoE sees an improving economic outlook for the UK
- Activity in the services sector grew strongly
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Gilt yields rose and gilt prices fell during July amid expectations that the Bank of England (BoE) would increase its key interest rate at the Monetary Policy Committee’s (MPC’s) August meeting. In the end, the MPC raised base rate by 25 basis points to 0.75% early in August. Over July as a whole, the yield on the benchmark government bond climbed from 1.31% to 1.39%, while the yield on the short-dated gilt – which matures in 2021 – rose from 0.71% to 0.83%.
“The pound fell below US$1.30 for the first time since September 2017”
The outlook for the UK economy has improved, according to BoE Governor Mark Carney, who reported growth in demand that is outstripping supply, and intensifying pressures on domestic costs. The BoE appears to believe that soft economic growth of only 0.2% during the first quarter was largely attributable to unusually wintry conditions, and household spending and sentiment have “bounced back strongly”. Nevertheless, Mr Carney issued a cautionary note about the ongoing escalation of trade tensions, citing rising levels of “protectionist rhetoric” that are contributing to a “hostile and uncertain trading environment”.
The pound fell below US$1.30 for the first time since September last year during July as disappointing retail sales data triggered concerns that inflationary pressures are starting to falter. The annualised rate of inflation – as measured by the Consumer Prices Index (CPI) – remained at 2.4% during June, dampened by lower prices for clothing, footwear, toys and games; in comparison, average earnings (excluding bonuses) rose by 2.7% in the three months to May.
Government borrowing over the three months to June reached its lowest level since 2007, according to the Office for National Statistics (ONS). Total borrowing so far in the current financial year came to £16.8 billion, which is £5.4 billion lower than in the same period in 2017.
Activity in the UK services sector grew at its most rapid rate since October 2017 during June, according to IHS Markit/CIPS. Activity was boosted by a sharp rise in business costs underpinned by higher wage growth and an increase in energy prices, and recent hot weather is also believed to have played a part. Growth in new business activity was particularly strong, reaching its highest level for over a year. Brexit-related uncertainties, however, appears to be holding back business investment to some extent, particularly with regard to large corporates who are delaying spending on big-ticket items.
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