UK government bond yields climbed in June, driven up by concerns over persistent inflationary pressures, expectations of further monetary tightening, and a lacklustre economic outlook.
- The MPC raised its key base rate by 50 basis points
- The UK economy grew by 0.2% in April
- Consumer sentiment continued to pick up
Gilt yields rise: UK government bond yields climbed in June, driven up by concerns over persistent inflationary pressures, expectations of further monetary tightening, and a lacklustre economic outlook. The yield on the two-year gilt breached 5% for the first time since 2008, while the yield on the ten-year gilt rose to levels last seen after the mini budget in September last year. The FTSE 100 Index rose by 1.1% during June, while the FTSE 250 Index fell by 1.6%.
“Core inflation rose to 7.1%, representing its highest level since March 1992”
Rates continue to climb: the Bank of England raised its key base rate by 50 basis points to 5% during June, taking rates to their highest levels since October 2008. This was the Monetary Policy Committee’s 13th consecutive increase in rates as policymakers try to quell persistent inflationary pressures. The rate of consumer price inflation remained unchanged at 8.7% year on year in May; however, core inflation rose to 7.1%, representing its highest level since March 1992.
UK set to avoid recession: having shrunk by 0.3% in March, the UK economy expanded by 0.2% during April, boosted by stronger activity in the services sector. The Organisation for Economic Co-operation & Development (OECD) expects the UK to avoid recession in 2023, forecasting the economy to grow by 0.3% this year. Nevertheless, the OECD warned that the UK was likely to find it hard to manage the impact of higher interest rates on government debt.
Consumer sentiment improves: although it remained in negative territory, GfK’s index of UK consumer confidence continued to pick up during June, posting its fifth straight monthly increase. Elsewhere, average earnings (excluding bonuses) rose by 7.2% between February and April; however, the rate of wage growth remains significantly below the rate of inflation, and wages fell by 1.3% in real terms over the period.
UK equities out of favour: according to recent data from the Investment Association (IA) , UK retail investors focused on fixed income sectors in May. Government Bonds was the top-selling IA sector, receiving inflows of £658 million, and UK Gilts was the third best-selling IA sector with inflows of £344 million. In comparison, UK equity funds suffered net outflows of £1.2 billion over the month: the mainstream UK All Companies was the worst hit, experiencing outflows of £916 million, while the UK Smaller Companies and UK Equity Income IA sectors also remained out of favour.
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