After inflation disappointment, Gilt yields have soared to mini-Budget levels

After the UK reported much higher inflation than Bank of England hoped, gilt yields reached levels not seen since the “mini” Budget Crisis of last year.

The market expects further interest rate increases after official figures showed that consumer price was 8.7% for April, down from the March figure of 10.1 percent but still significantly higher than the BoE’s estimate of 8.4%.

The UK inflation rate is about twice as high as the US equivalent and much higher than the Eurozone.

The yield on two year gilts jumped 0.24 percentage points, to 4.37 percent. This is close to the levels last year, when Liz Truss’s unfunded tax reductions caused havoc in the financial markets.

Quentin Fitzsimmons is a senior portfolio manger at US asset manager T Rowe Price. He described the market’s reaction to inflation data as an “amber flag” — if it wasn’t a red one.

He said that inflation was so high that the BoE will be forced to increase interest rates beyond the current level of 4.5%.

He said, “I don’t know what will stop this trend short of a recession that is very significant.”

Forward traders are betting now that rates will reach a peak of about 5,3 per cent at the end the year.

Last year, borrowing costs dropped after Truss was removed from power and the BoE intervened. The yield on two-year bonds, which peaked in September at 4.7%, dropped to just under 3% in November, before steadily rising in recent weeks.

Allan Monks is a UK economist with JPMorgan. He argued that the Bank of England couldn’t ignore Wednesday’s surprising inflation data.

He said, “[The data] can’t be described as an isolated event or as simply an indirect byproduct from the rise in food and energy prices as the BoE has tended to suggest until very recently.”

The impact of adjusting for energy price increases in early 2014 was widely expected to result in a significant drop in headline inflation. Core inflation in April jumped from 6.2 to 6.8 percent.

The food price inflation rate remained near its 45-year high, at 19,1 percent compared to 19,2 percent in March.

Andrew Bailey, the governor of the BoE, did not give any assurances when asked whether the inflation rate would be halved by the end the year – a target that Prime Minister Rishi Sunak has set.

He said, “I think that we will have to wait and see what the news and evidence are.”

Bailey acknowledged this week that central bank’s economic model was not accurate, and there are “very large lessons to be learned” about the management of price increases.

The BoE said it would raise interest rates if the inflation rate continues to rise.

Samuel Tombs is the chief UK economist for Pantheon Macroeconomics. He said that Wednesday’s numbers were likely to cause the Monetary Policy Committee of the central bank to take action again. He said that the MPC would not be able to reduce its rate of inflation in June due to a “too slight” drop.

The Office for National Statistics stated that the headline rate decreased due to more stable energy prices. However, this was offset in large part by the substantial increase in prices for second-hand cars as well as cigarettes.

Kitty Ussher is the chief economist of the Institute of Directors. She said that there was still the chance for the drop in the headline rate to change the sentiment of companies when setting wages and prices.

She said that policymakers would hope that, now that the headline inflation rate has returned to single-digits, future expectations of inflation will also begin to drop. This could then become self-fulfilling.

Even though electricity and gas bills were frozen, UK prices increased by 1.2 percent in April.

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