Andrew Bailey is trying to push back against market expectations. Gilts aren’t having any of it. This is partly due to the global backdrop of global government debt selling. The 10-year US Treasury yield hit 4.00% yesterday. Bund yields are surging.
The Eurozone CPI numbers out this morning were a warning: core CPI inflation (ex-food, energy, alcohol & tobacco) accelerated from 5.29% to 5.60% in February, far ahead of expectations, driven by services inflation (from 4.35% to 4.79%).
Clearly, the BoE hasn’t got a handle on inflation yet, despite the drop in wholesale energy prices. According to Kantar, grocery prices in the four weeks to February 19th rose 17.1% y/y, the highest rate since its records began in 2008. It is remarkable that telecoms groups are passing on inflation increases of RPI +3.9% (i.e., 17.3%), even if Ofcom is now investigating these broadband and mobile tariffs.
Some of the lowest paid workers in Britain are getting hefty wage increases of between 10-20%, and public sector wage pressures are coming through. The governor of the BoE risks looking a bit detached from reality, which is not good for sterling. Even the BIS has come out forcefully to dismiss the suggestion of rate cuts in 2023, which the US Treasury market is finally now pricing in.
Gilt yields have climbed back to mini-budget crisis levels. It is a remarkable turnaround. The 10-year Gilt yield climbed to 3.84% yesterday, finishing above the close on September 23rd, the day of the mini budget (3.80%).
