EcoTV Week

United Kingdom: “God save the Gilt”


Gilt yields surged right along the yield curve, increasing downward pressures on the pound sterling.


The British pound sterling has seen further falls recently against a backdrop of strong depreciation in recent weeks. These movements in the value of the pound are part of a bearish trend since the beginning of the year and particularly since Brexit.

Since the beginning of the year the United Kingdom has been characterised by higher inflation and a greater downturn in macroeconomic outlook than its European and North American partners. In addition, the more aggressive raising of key rates by the US Federal Reserve (Fed) has resulted in portfolio arbitrage to the detriment of the pound. While the depreciation of the pound has been particularly evident against the dollar, it has also seen significant falls against the euro.

Since Liz Truss became Prime Minister at the start of September, the downward pressures on the pound have increased. The presentation of the “mini-budget” was the catalyst for a tempestuous reaction on the gilts market (British sovereign bonds), which itself caused the pound to fall.

Kwasi Karteng, the Chancellor of the Exchequer, simultaneously announced a massive support plan and drastic tax cuts, a total package of around £250 billion over five years (equivalent to 11% of GDP). In addition to this colossal amount, what worried the markets was the fact that in the absence of any compensatory measures the government would have to borrow more.

Following these announcements, gilt yields surged right along the yield curve while the pound lost 3% in one day against the dollar, its lowest level in 37 years. Faced with these brutal market movements, the Bank of England has put in place an emergency programme to buy £65 billion of sovereign bonds. This has enabled gilt yields to return to their pre-mini-budget levels.

For her part, Liz Truss has reversed a symbolic measure, namely the tax cut for the highest incomes. This U-turn could also lead to other changes to the plan that was announced.

Ultimately, the significant turbulence affecting the pound and the gilt market are partly the result of the poor coordination of monetary and budgetary policies in a deteriorating macroeconomic context. Although the Bank of England’s intervention has helped to calm the turbulence, the risk of recession and the question of the sustainability of British public finances are still a concern.

Félix  BERTE
Team : OECD economies