UK policymakers set to tighten?

8th November, 2021

Interest rates are widely expected to rise at the October meeting of the BoE’s Monetary Policy Committee (MPC). Rates currently stand at 0.1% – their lowest level in the central bank’s 327-year history – but are tipped to increase by 15 basis points, which would return them to their pre-pandemic level of 0.25%. The UK’s annualised rate of consumer price inflation eased slightly from 3.2% to 3.1% in September but remained significantly above the Bank of England’s (BoE’s) target of 2%. The benchmark UK gilt yield rose as high as 1.22% during the month.

High demand for “green” gilt issue: the UK issued its second “green” government bond during October: demand was high for the gilt, which has a coupon of 1.5% and matures in July 2053. Its proceeds will be used to fund green projects. The heavily oversubscribed issue raised £6 billion, following September’s issue, which raised a record £10 billion and matures in 2033.

Autumn Budget: Chancellor of the Exchequer Rishi Sunak unveiled increased spending on public services and upgraded economic forecasts in his Autumn Budget & Spending Review. He also cut the universal credit taper rate, simplified alcohol duties, and announced a new 50% business rates discount for companies in the retail, hospitality, and leisure sector. Nevertheless, he warned that global economic uncertainty is increasing, and the UK’s public finances are twice as sensitive to changes in interest rates than before the pandemic, and six times more sensitive than before the financial crisis. Over October, the FTSE 100 Index rose by 2.1% while the FTSE 250 Index edged 0.3% higher.

Labour market continues to tighten: job vacancies hit record levels over the three months to September, rising to 1.1 million. The unemployment rate fell to 4.5%. The UK economy expanded by 0.4% during August but remained 0.8% smaller than its pre-pandemic size. The Office for National Statistics (ONS) also revealed that the economy actually contracted by 0.1% during July after an initial calculation of 0.1% growth.

Profit warnings on the increase again: profit warnings from UK listed companies rose sharply during September. According to EY, 70% of warnings were from companies that had not issued a warning in the previous 12 months, and 43% of warnings cited problems with supply chains or costs.

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