The above graph shows the movement of Gilt yields after the MPC announced they had voted unanimously for keeping the official base rate at 0.5% and keeping QE at £375bn (source).
What is a Gilt?
A Gilt is financial instrument issued by the Bank of England as a means of issuing debt. The name ‘Gilt’ comes from when the debt issued was printed on a ‘gilded’ piece of paper.
As the BoE has announced today that they don’t intend to increase QE or drop the base rate, yields have risen for a number of reasons.
Economic: the yields may have risen in worry that the UK economy is not performing, the fact that QE has not been tapered and that the base rate has not risen could indicate to the markets that the BoE does not think that the UK is near strong economic growth yet.
Direct: QE’s main purchase has been (and would be) gilts. As more gilts are bought their price rises and their yields drop, but if QE is not to be increased then investors expect that the demand for these assets will not increase, therefore causing a rise in yields.
Rising yields have a number of consequences. Immediately they won’t have much of an official effect on the UK, apart from the information they signal to the rest of the markets (i.e. we could expect the FTSE100 to have a ‘not-so-good’ day today with yields rising). But in the long-run they increase the cost of UK borrowing, and therefore make servicing our debt far more expensive. As a result we are all worse off as the Government has to pay more to service debt and therefore less on its citizens.
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