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Gilts fall as UK inflation runs ahead of BoE target

UK gilts dropped after data showed the country’s rate of inflation was running ahead of the Bank of England’s target, piling pressure on the central bank to rein in its pandemic-era bond-buying programme.

The yield on the 10-year gilt rose 0.04 percentage points to 0.677 per cent as the price of the government debt fell, while the pound strengthened against the dollar and the blue-chip FTSE 100 dipped lower.

The moves came after Britain’s inflation rate rose 2.5 per cent in the 12 months to June, in the third consecutive month of consumer price rises that were higher than economists had expected.

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The BoE, which has increased its debt holdings from £645bn to £895bn since March 2020, was criticised last month by Andy Haldane, who recently left as its chief economist, for heading towards an “economic handbrake turn” if it remained relaxed about inflation.

The CBI business lobby has also forecast that UK economic output will return to its pre-coronavirus level by the end of 2021, a full year earlier than it had previously expected.

“We should remember that extra asset purchases and a rate cut to 0.1% were enacted as emergency measures last year, and that these could be reversed if the [BoE] deems the economic emergency to be over,” said Ed Monk, associate director for personal investing at Fidelity International.

The FTSE 100 dropped 0.4 per cent as shares in major exporters such as aircraft engine maker Rolls-Royce and fashion house Burberry fell. FTSE bank shares rose 0.4 per cent overall, however, as traders bet on the BoE moving closer to its first post-pandemic interest rate rise that would allow lenders to increase customers’ borrowing costs.

Sterling gained 0.3 per cent against the dollar to purchase $1.3844.

Elsewhere in markets, the Stoxx Europe 600 share index dropped 0.3 per cent as traders stayed cautious ahead of potential new signals from the US Federal Reserve about the path of inflation and interest rates in the world’s largest economy.

The yield on the benchmark 10-year US Treasury fell 0.02 percentage points to 1.4 per cent. Brent crude dipped 0.2 per cent lower to $76.27 a barrel.

Fed chair Jay Powell will give his semi-annual report on monetary policy to Congress later on Wednesday. US headline consumer prices rose 0.9 per cent between May and June, exceeding economists’ forecasts with the largest monthly gain since 2008.

But while the price rises have intensified debate within the Fed about when to reduce the $120bn of monthly debt purchases that have boosted global markets since March 2020, Powell has previously argued the inflation surge will be temporary.

“I would be very surprised if Powell said anything other than that he was waiting for substantial further progress [for the economy], but clearly Fed speak is a big driver for global markets so there are reasons to be cautious ahead of the testimony,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.

Powell’s appearance before Congress comes after other central banks began winding down their emergency stimulus schemes.

New Zealand’s dollar rose 1 per cent against its US counterpart on Wednesday to 70.1 US cents after the Reserve Bank of New Zealand said it would halt its additional asset purchases by July 23 because economic activity had moved “above its pre-Covid-19 level”. The move follows similar decisions in Canada and Norway.

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