Demand for UK gilts rose during October as Covid-19 infection rates continued to climb, and the UK and EU failed to progress their post-Brexit trade negotiations.
- The UK economy expanded by 2.1% during August
- Speculation over the possibility of negative interest rates continued
- Moody’s cut the UK’s credit rating from Aa3 to Aa2
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Demand for UK gilts rose during October as Covid-19 infection rates continued to climb, and the UK and EU failed to progress their post-Brexit trade negotiations. At the end of the month, the UK Government announced new lockdown measures for England, triggering concerns over the prospect of a double-dip recession.
“Public sector net debt has grown to 103.5% of the UK economy”
The yield on the benchmark UK gilt rose from 0.23% to 0.26% over October as a whole, but fell as low as 0.17% during the month as investors became increasingly nervous over the outlook for the UK’s trading relationship with Europe after 31 December.
The coronavirus pandemic has had an impact on public sector borrowing that is “unprecedented in peacetime”, according to the Office for National Statistics (ONS). Government borrowing rose to £36.1 billion during September, representing the third-highest borrowing in any month since records began in 1993. Public sector net debt has grown to 103.5% of the UK economy – its highest debt ratio since 1960.
Credit ratings agency Moody’s cut the UK’s credit status from Aa3 to Aa2, but upgraded its outlook from “negative” to “stable”. Moody’s cited a diminution in the UK’s economic strength caused by the pandemic and Brexit-related uncertainty. Moody’s believes that the UK’s fiscal strength will continue to deteriorate as a result of the pandemic, and criticised the Government for its inability “to manage change in a predictable and confidence-building manner”. Even if the UK manages to reach a deal with the EU before the end of 2020, Moody’s warned that it is likely to be “narrow in scope and therefore the UK’s exit from the EU will … continue to put downward pressure on private investment and economic growth”.
The UK economy expanded for a fourth consecutive month in August, although the rate of expansion slowed from 9.1% in June and 6.4% in July to 2.1% in August. Elsewhere, the rate of unemployment rose from 4.1% in the three months to July to 4.5% in the three months to August, representing its highest level since early 2017.
Deputy BoE Governor Sam Woods asked UK banks to assess their ability to cope effectively if interest rates are cut to zero or below zero, fuelling speculation that the central bank is poised to move its key rate into negative territory. UK interest rates have remained at an all-time low of 0.1% since March.