The BoE struck a dovish tone yesterday: but it will have to be more forceful to stem the steady ascent of long-duration Gilt yields in 2023. It has largely gone under the radar, but UK Gilt yields are creeping back up, notably for 10- and 30-year maturities.
The BoE has been trying to lower market expectations for bank rate. This has just resulted in an upward-sloping UK yield curve between 30 and 10 years (+0.42%). The BoE’s cautious approach may ultimately be self-defeating if it does not get inflation down as fast as in the US.
All the attention has focussed on the post-mortem of the LDI-driven gilts crisis. But this threatens to miss the point: gilts will still be prone to selling pressure because of the sheer amount of supply coming onto the market.
There are several aspects to this week’s UK data that present a major concern for the Gilt market, and sterling. Wages in the UK are growing at a faster rate than in the US (in nominal terms). To be clear, the PAYE data are experimental, and often get revised. But the annual growth rate in median pay (wages & salaries) from PAYE accelerated to 7.95% in November.
The strikes in the UK are hitting the supply side of the economy, exacerbating the inflation risks. Overall services inflation firmed again from 6.28% to 6.35%. The detail of the latest CPI report was not encouraging: some components of services inflation that would be particularly responsive to higher labour costs rose strongly. The restaurants & cafes CPI jumped 9.81% y/y, the largest annual rise since March 1992.
