Markets have turned positive on UK government bonds, which rallied across the curve following the release of unemployment data indicating a higher rate and softer earnings, all of which soft, signalling all of which could push inflation lower.
Expectations are that the Bank of England will reduce rates at the next Monetary Policy Committee (MPC) meeting on 6 February.
“While the MPC’s decision to leave Bank Rate unchanged at the last meeting in December was widely expected, the overall impression was of a slight dovish shift,” noted Anna Titareva, GB economist at UBS, on 15 January. “First, three MPC members voted for a 25bp rate cut – a slightly more dovish vote than we expected. Second, the data (although predominantly survey rather than hard data) since the last meeting has been on the weak side signalling slow activity at the end of 2024. In this context, today’s inflation print adds to a set of soft data reinforcing our call for a 25bp rate cut at the next meeting on 6 February. Looking ahead, we continue to expect cumulative rate cuts of 150bp this year, with 25bp cuts each in Feb, May, Aug, Sep, Nov and Dec, to 3.25% by end-25.”
The current Bank of England borrowing rate is 4.75%, while inflation is 2.5% according to Bank of England data; UK government borrowing costs on 21 January 2025 ranged from 4.334% on the 2-Year to 5.151% on the 30-Year, according to Morgan Stanley data.
The UK’s Debt Management Office (DMO) made its first syndicated transaction of the calendar year 2025 on 21 January, with indicative price guidance for investors at a spread of 4.0 to 4.25 basis points (bp) above the yield on the reference gilt (4¼% Treasury Gilt 2039). The book closed with 279 allocated orders according to the DMO, with the nominal size of the syndication announced as £8.5 billion and proceeds from the transaction amounting to approximately £7.9 billion in cash, taking long conventional gilt sales for the financial year to date to £55.4 billion.
Commenting on the result, Jessica Pulay, chief executive officer of the DMO, said, “This transaction saw a very high-quality investor order book; furthermore the level of investor demand was very broad-based. Both the quality and breadth of investor demand have enabled a sizeable re-opening of 4⅜% Treasury Gilt 2040, which supports the bond achieving benchmark status within a relatively short timeframe. With today’s transaction we have now concluded the long-dated conventional gilt syndication programme for this financial year.”
Total gilt sales for the financial year to date amount to £229.7 billion, relative to the overall remit target of £296.9 billion. Transfer from the unallocated portion of gilt issuance to the long conventional gilt syndication programme £3.4 billion is being transferred from the unallocated portion of gilt issuance to the long conventional gilt syndication programme, reducing the residual balance in the unallocated portion of gilt issuance to £2.6 billion.
The next syndication in the 2024-25 programme is scheduled to be the sale of a new conventional gilt maturing in the 10-year area in February 2025, subject to demand and market conditions.
“The key uncertainty for the inflation outlook is the companies’ pass-through of the increase in the minimum wage and national insurance contributions in April – whether the adjustment will happen through prices or labour demand/wages,” Titareva wrote. “While we think that more labour intensive sectors that are operating with narrow profit margins (e.g hospitality) will likely be rising prices, at the aggregate level we expect stronger adjustment on the labour demand side leading to a further slowdown in wage growth and ultimately services inflation. Having said that, we acknowledge the risk of slower (quarterly) cuts throughout 2025, if the Budget measures were to boost inflation in line with the BoE’s estimates.”
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