Following Mark Carney’s rendition of a ‘Whatever It Takes’ speech yesterday, gilt yields have turned negative in the UK. It’s only one gilt affected so far, maturing in March 2018, and now yielding -0.04 perspective, but this is a landmark for the UK interest rate environment.

Anyone who buys this gilt is paying the UK government for the privilege of lending it money, and this is despite the fact the ratings agencies have downgraded UK government debt in light of the Brexit vote. The UK now joins Germany, Austria, the Netherlands, Denmark, Switzerland and Japan in the club of countries where gilt yields have turned negative. As a result of the Governor’s speech yesterday, markets are now expecting an interest rate cut, and/or more Quantitaive Easing over the summer, which has pushed fixed interest rates down. The benchmark UK 10 year gilt is now yielding 0.87 perspective, down from 1.37 perspective before the referendum vote, and 4.5 perspective before the financial crisis. 

Meanwhile the stock market has risen sharply after Mr Carney’s speech, not least because a 3.5 perspective dividend yield from the stock market now appears more attractive than interest rates on cash and bonds, which look like staying lower for longer. Such low and negative gilt yields suggests a long period of weak economic performance and loose monetary policy to come. Markets are now pricing in a cut in base rate from 0.5 percent when the Bank of England’s monetary policy committee meet on 14^th July. They are also pricing in a one in four chance of base rate turning negative over the course of the next year. 

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: ‘The UK is now officially through the looking glass, as the Brexit vote has pushed gilt yields below zero for the first time. Remarkably markets are now expecting interest rates to lurch downwards, despite already being at record lows. The ultra-low interest rate environment paints a depressing picture of our economic prospects, though the gilt market has been so heavily tainted by central bank interference, it’s hard to know how reliable an indicator it is. Such low interest rates are great for borrowers, but awful for cash savers, and for banks. Cash savers have already suffered 7 years of ultra-low interest rates, and on current expectations it looks like they will comfortably see out a decade without getting a half-decent return on their deposits. 

The stock market likes falling interest rates though, and indeed the accompanying fall in the pound, so understandably the Footsie rose on the back of Mark Carney’s comments. In a world where you have to pay money to lend to the government, an investment in the stock market which pays you three to four percent a year looks attractive, even if it can be volatile.

In his speech yesterday, Mark Carney did issue a warning that there is a limit to what central banks can do, and that the fate of the UK economy also depends on the actions of others. It is unclear whether he was referring to the forthcoming EU negotiations, or whether he is hinting to the Treasury that fiscal policy needs to join in the battle to stimulate the economy. Either way, with interest rates approaching zero, the Bank of England is testing the limits of its powers.’