David Roberts

Sterling hits new lows - so why is everyone rushing to buy gilts?

David Roberts

“Sterling tumbles to two-year low” reads the FT headline. Never mind a two year low versus the US dollar, on a trade weighted basis sterling isn’t far off its lowest point this century.

Trade-weighted sterling

Why then is everyone still rushing to buy gilts? The UK two year gilt yield has contracted by 30 basis points over the last three months to trade at 0.46%.


If markets are pricing in a greater likelihood of a Bank of England rate cut, this has some worrying implications for inflation. The currency has already done its job as a free-floating exchange rate, falling to cushion UK economic performance from the uncertainties of recent years.


I spent a few years studying international economics – but I must have been off the day they taught that rate cuts are the appropriate response to currency weakness. To cut rates at a time when real wages are rising risks stoking inflation and accelerating the pound’s plunge. Mind you, it could be a brilliant trick to inflate away the UK's debt burden, great news unless you own gilts already (which we don’t). It could also help support our shiny new PM’s desire to increase fiscal spend, with sterling weakness translating to a higher tax take from FTSE 100 companies’ overseas earnings.


One final thought: the chart above shows that the NHS now needs to pay £1bn to buy drugs that cost it £800m in 2015. This is
not a political comment, this is a fact (remember when we cared about those?).


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Tuesday, July 30, 2019, 3:00 PM