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A brief thread on gilts. Apologies, it's an arcane subject. But the market in government debt, much more than the Bank of England, determines the interest rate homeowners and businesses pay. Today, the yield on 2 year money rose by 26 basis points. 1/6
Inflationary pressures are persisting in the UK more than in other countries, and this is feeding through to 2nd round effects on wages. Employees and employers are being perfectly rational. We are at full employment. Labour has negotiating power, 2/6
albeit not enough to secure anything other than real wage reductions. But the BoE which has been behind the curve on interest rates has to act decisively otherwise sterling will fall creating more inflation. Higher interest rates cause massive problems for households. 3/6
They also cause massively problems for the government. Debt interest payments are already growing faster than any other spending programme, crowding out spending priorities like the NHS. An election is on the horizon. 4/6
But I can't remember an election when 18 months out interest rates were still rising steeply. It's still possible the government may get lucky: underlying inflation may come down quicker than expected. But I wouldn't bet on that. 5/6
Much more likely that the Bank of England will raise rates to a level where a recession next year becomes inevitable. As a Chancellor said 34 years ago (albeit a year further out from an election) "if it isn't hurting, it isn't working". #soundmoney 6/6
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