The UK central bank had already been seen as having been less hawkish than the US Federal Reserve Bank in fighting inflation.The 3% rise year-to-date in long-dated UK government bonds is the largest rise over a short term period within the UK’s history. Yields on long-term bonds and related fixed income derivatives, which had already risen year-to-date, spiked up rapidly. Markets did not like the announcement either (understatement).Applying fiscal stimulus during a wage-price spiral runs counter to established consensus wisdom around sound economic policy, and the UK actions have been widely criticized by multilateral financial institutions and even by some foreign governments, which normally would not comment on the local politics of friendly nations. This was seen by markets as a massive fiscal stimulus, being applied at a time when inflation was already running high. In this context, following a recent change in political leadership in the UK, and in an effort to address cost-of-living pressures, the UK Chancellor of the Exchequer announced a “mini-budget”, including significant tax cuts not offset by spending reductions.Because of Brexit, there would have been underlying challenges to growth, and some inflationary and sentiment pressures, that are UK-specific, even absent the broader global and European economic challenges.It would be hard to parse out the impact on sentiment of Vladimir Putin’s more recent and more specific threats to use nuclear weapons, but this certainly has not helped. Like most European countries (in the sense of Europe the continent/region, not the European Union), the UK was experiencing an energy and food price shock because of the Russian invasion of Ukraine, and impacts on business and consumer sentiment from bearing witness to a war and humanitarian crisis up close, on a scale the continent has not experienced in more than 70 years.Like most developed markets, the UK was already dealing with a wage-price spiral, in the UK’s case involving double digit inflation.First, if you’re reading this and you actually are involved in the oversight of a defined benefit (DB) plan in the UK, please see our recent video for UK clients which was filmed before the Bank of England stepped in on Wednesday 28 September. Your investment committee, staff, actuaries, investment consultants and investment managers will hopefully have already been helping you take appropriate actions to navigate the situation in line with your objectives. There has been a lot to deal with quickly.įor everyone else, here is a brief summary of what has happened in the UK.
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