UK Government bond prices moved higher (causing yields to fall) this week following comments from the Bank of England’s chief economist, Huw Pill, that the bank may be willing to consider interest rate cuts in the middle of next year.
Similar price moves have been experienced in the US and Europe in recent weeks after a collection of economic indicators pointed towards a weakening environment for growth. This has led some investors to question the recent mantra within markets that interest rates look set to remain “higher for longer”.
Changes in government bond prices have the ability to affect, to a greater or lesser degree, a wide range of assets. They set a benchmark for risk-free returns and provide a baseline for assessing the relative attractiveness of different investments. With yields falling over the week, areas of the market sensitive to interest rates (corporate bonds, property, infrastructure, and growth stocks) were bright, continuing the positive start to November.
It is pleasing to see the oil price continue to drift lower this week. Having spiked to around $96 a barrel as the tragic conflict in the Middle East intensified in early October, Brent oil now trades at around $80 a barrel. This will be welcomed by motorists but also cheered by central bankers as the increase in fuel costs risked undoing some of their hard work in retaining control of inflation.
Next Wednesday, we get October’s inflation data for the UK. We should hopefully see a decent fall from September’s 6.7% figure and get closer to Rishi Sunak’s important target of 5.3% by the end of 2023.
John Naylor, Chartered FCSI – Head of Investment Committee