Rachel Reeves Faces Pressure: What’s Going on with UK Borrowing Costs?
Rachel Reeves is under intense scrutiny as the UK’s borrowing costs hit levels not seen since the 2008 financial crisis. With borrowing and tax increases off the table, the Chancellor has little choice but to consider further spending cuts. Departments have already been tasked with finding efficiency savings of 5% of their budgets, and more cuts could be on the horizon. Reeves is also urging ministers to scrap measures that hinder growth and propose alternative strategies to boost the economy.
Why Are Borrowing Costs Rising? When borrowing costs (aka bond yields) go up, it gets more expensive for the government to borrow money. Yields on 10-year gilts recently hit 4.89%, the highest since 2008. Investors are worried about how sustainable the UK’s finances are. It’s like a bad flashback to 2022, when Liz Truss’s mini-budget caused market chaos.
Rising Bond Yields: A Warning Sign?
The cost of government borrowing, reflected in the yields on government bonds, continues to climb. Ten-year gilt yields recently rose to 4.89%, the highest since 2008. Although they settled slightly lower at 4.82% by the end of the trading day, the trend raises concerns about fiscal sustainability. Higher yields indicate falling bond prices and growing unease among investors about the UK’s financial outlook. Isabel Stockton from the Institute for Fiscal Studies notes that Reeves’ fiscal headroom was already razor-thin, and persistently high interest rates could force her to make tough decisions to stay within her self-imposed fiscal rules.
UK Economy: From Growth Leader to Stagnation
The UK’s economic momentum has slowed dramatically. Once the fastest-growing G7 economy in early 2023, growth has faltered. GDP growth for the second quarter of 2024 was revised downward, and the economy contracted by 0.1% in both September and October. The Bank of England’s outlook for the final quarter of 2024 is zero growth, a downgrade from an earlier forecast of 0.3% growth. Inflation remains a persistent issue, expected to reach 3%, delaying anticipated rate cuts. The Bank’s Monetary Policy Committee now predicts only two rate cuts in 2025, down from four projected before the Budget.
As a side note, the bigger problem with the yield moves and the worsening economic data prints is how it feeds through to confidence. We’re in a mess that is getting worse, and unless someone takes a hold of the mess, companies aren’t going to be saying positive things in this environment.
Business Sentiment and Job Market Challenges
The Confederation of British Industry (CBI) reports that firms expect economic activity to decline sharply in early 2025. Businesses are responding to the challenging environment by reducing headcounts, cutting hours, and postponing investments. Retail spending is falling, job vacancies are disappearing, and overall economic sentiment is grim. The term “recession” is being used with increasing frequency as the outlook darkens.
Political Criticism and the China Trip Controversy
Reeves is catching heat from the opposition. Shadow Chancellor Mel Stride slammed her for going to China instead of dealing with the rising borrowing costs at home. He called her “missing in action.” Meanwhile, Treasury Chief Secretary Darren Jones defended her, saying global factors are at play and there’s no need for an emergency response. Jones argued that global factors were driving the rise in bond yields and maintained that the bond market was functioning in an orderly way, dismissing the need for emergency intervention.
Still, critics say Reeves isn’t doing enough to reassure people. It’s a political headache she probably didn’t need right now.
Are We Facing Stagflation?
There’s a lot of talk about stagflation—that’s when you have high inflation and no economic growth. With high inflation and stagnant growth, fears of stagflation are growing. Job vacancies are disappearing, retail sales are dropping, and the word “recession” is being thrown around more often. Markets are feeling fragile, and expectations for returns are pretty low. Some optimists say this could be a good time to buy,
What Lies Ahead?
Reeves has a lot on her plate. She’ll need to come up with a solid plan to tackle these issues while keeping the economy stable. The March fiscal statement will be a big moment. Until then, it’s anyone’s guess how this will play out.
Economic malaise in broken markets… In a tough market like this, finding good trades is challenging. After three years of weak market flows, it’s hard to tell when things might turn around for UK markets. But when they do, there’s hope that prices will start climbing steadily, bringing more participation and energy back to the market, with everyone eagerly jumping back in and sharing their success. Meanwhile, the US market throws a massive party, only to sell off slightly—a minor dip that doesn’t even qualify as the overdue correction they probably need. Yet, the UK market takes the hit even harder, piling more pain onto the already gloomy outlook.
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