Against the backdrop of heightened uncertainty caused by the intensifying coronavirus crisis, investors continued to lose their appetite for risk during March, and government bond yields continued their decline.
- The BoE implemented two emergency interest-rate cuts
- Quantitative easing measures were extended
- Economic growth is expected to fall
To view the series of market updates through March, click here
Against the backdrop of heightened uncertainty caused by the intensifying coronavirus crisis, investors continued to lose their appetite for risk during March, and government bond yields continued their decline. Over March as a whole, the yield on the benchmark UK gilt fell from 0.44% to 0.35% and the pound posted a sharp decline against the US dollar.
“The Bank of England reported a deterioration in conditions in the UK gilt market”;
The Pension Protection Fund (PPF) warned that a sharp drop in bond yields increases the deficit in defined-benefit pension schemes. According to the PPF’s ‘Purple Book’, a fall of 0.1 percentage point fall in nominal and real gilt yields increases defined benefit pension scheme liabilities by 1.9%.
The Bank of England (BoE) reported a deterioration in conditions in the UK gilt market as investors focused on “shorter-dated instruments that are closer substitutes for highly liquid central bank reserves”. During the month, BoE policymakers implemented two emergency interest-rate cuts, reducing the key base rate from 0.75% to 0.25%, and finally to a fresh all-time low of 0.1%. Warning of the “risk of an economic shock that could be sharp and large, but should be temporary”, the central bank also increased its programme of asset purchases to £645 billion. Andrew Bailey took over in March as Governor of the BoE from Mark Carney and will serve an eight-year term.
During March, Chancellor of the Exchequer Rishi Sunak unveiled a Budget designed to address the economic impact of the coronavirus, including measures to extend Statutory Sick Pay and to relieve pressure on medium-sized and smaller companies. The Office for Budget Responsibility (OBR) described the Budget as “the largest sustained fiscal loosening” since 1992. The OBR downgraded its economic growth forecast for the UK this year from 1.4% to 1.1%, although this prediction was published before the coronavirus crisis deepened. Later in the month, the Chancellor announced additional measures to provide additional economic support and to help the self-employed, warning: “We have never, in peacetime, faced an economic fight like this one”.
UK economic growth remained flat in the three months to January, and the annualised rate of consumer price inflation eased from 1.8% in January to 1.7% in February. Inflation is expected to have fallen further in March, dragged down by falling fuel prices and a steep decline in demand for non-essential consumer goods and services.
A version of this and other market briefings are available to use in our newsletter builder feature. Click here
