The December meeting of the Bank of England’s (BoE) Monetary Policy Committee maintained the base rate at 5.25% for the third consecutive time. Three committee members voted for a 25 bp hike and forward guidance remained that “monetary policy is likely to need to be restrictive for an extended period of time.” However, over the month, market pricing of a cut in rates shifted earlier (from August to May), and the number of expected cuts for 2024 also grew, with close to 175 bp priced in by year-end.
This shift in expectations gained further momentum from the latest UK inflation data, which showed the headline Consumer Price Index (CPI) for November dropping to 3.9% YoY (from 4.6% YoY in October), well below economist forecasts of 4.3% YoY. Core CPI, which excludes more volatile components like food and energy, remains higher at 5.1% YoY, but this was also well below its expected level of 5.6% YoY.
Nominal gilt yields moved significantly lower across the month, with 30-year rates falling 55 bp over December. Falls at the front end of the curve were even greater, with 5-year rates rallying over 70 bp MoM.
Overall in 2023, nominal gilt yields closed relatively little changed from their starting levels, with 5-year yields finishing the year around 15 bp lower, and 30-year yields just under 20 bp higher. However, these measures mask the volatility seen, with 5-year rates seeing a range across 2023 of over 210 bp and 30-year rates a range of 170 bp.
Inflation expectations finished 2023 lower across the curve, closing the year towards the bottom of their annual ranges. Falls were larger at shorter tenors, with 5-year swap inflation dropping over 50 bp across the year, and 30-year swap inflation moving lower by almost 20 bp.