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UK government bond yields have moved higher since the Labor government introduced its policies October first budget plan Borrowing costs rose to a multi-decade high last week, sparking widespread concern.
Prospects of public spending cuts or further tax increases come into focus 30 years in Phnom Penh yields reached their highest level since 1998. Despite Labor’s initial decline following its July election win, 2-Year Phnom Penh Yields have also climbed back above 4.5%, with the 10-year yield reaching its highest level since 2008.
The simultaneous fall in sterling, which hit its lowest level since November 2023 against the dollar on Friday, particularly highlighted the weakening investor confidence in the UK.
Borrowing costs are also rising Eurozone and usEconomists note that Britain is being pressured by external factors, including Donald Trump’s return to the White House and expectations that interest rates will be generally higher than previously expected this year.
But the surge in UK government bond yields is still causing headaches for the British government, which has pledged Restart economic growth At the same time, we ensure that the debt-to-economy ratio falls within five years. UK public sector net debt It currently accounts for almost 100% of GDP.
Michiel Tukker, senior European rates strategist at ING, said in a note on Friday: “The rise in gilt yields creates a self-reinforcing feedback in the UK’s debt sustainability by increasing the cost of borrowing for budget purposes. cycle.”
Tooker cited analysis by the independent Office for Budget Responsibility, which suggested that the recent rise in yields – if sustained – would wipe out an estimated 9.9 billion pounds ($12.1 billion) of room for the government to meet its targets. self-declared fiscal rules. As well as achieving the goal of lowering the UK’s debt-to-gross domestic product ratio over the longer term, the rules also require Labor to use revenue to pay for day-to-day government spending.
The Institute for Fiscal Studies think tank said on Friday there was a “knife edge” on Britain’s chances of achieving the latter fiscal rule, but that Finance Secretary Rachel Reeves might be “lucky”.
IFS deputy director Ben Zaranko said otherwise she would face “an unenviable set of choices”, including early Changes in how debt is calculated Free up more space; cut current spending plans; announce more tax hikes that could be conditional on changes in future years; or do nothing, violating her rules.
Economists Ruth Gregory and Hubert de Barochez of research firm Capital Economics also said UK government debt could be trapped in a “vicious cycle” , in which “Rising gilt yields are putting pressure on public finances, leading to calls for further tightening of fiscal policy.” policies, but in turn put additional pressure on the economy. “
GBP to USD.
Bank of America Global Research strategists said on Friday that Labor was unlikely to break its rules and would instead announce further fiscal consolidation measures – measures to reduce public debt, typically public spending cuts or tax increases – in the spring or earlier.
This could be achieved through spending cuts, they added. Tax increase of £40 billion Labor announced in October.
“This administration’s commitment to fiscal rules and sound public finances is non-negotiable,” a Treasury spokesperson told CNBC.
“The Chancellor has made clear that tough decisions will be made on spending and a spending review is underway to eliminate waste. In the coming weeks and months, the Chancellor will leave no stone unturned to deliver and fight for growth in the economy. “working people”.
UK stuck in ‘slow growth trap’ – but not a mini-budget crisis
Former British finance minister Vince Cable told CNBC on Friday that the rise in bond yields in many countries was not an “emergency panic situation” but that the market had realized that the United Kingdom had fallen into a “slow growth trap.”
“We’ve had a number of years since the financial crisis, and then Brexit, and then the issues with Covid and the war in Ukraine, we’ve been stuck with relatively high inflation and very slow growth, so the market is pricing the UK lower, Relatively speaking, this is not a panic situation or a crisis like an old balance of payments sell-off situation,” Cable said.
Labor should be looking for wider tax increases rather than focusing on national insurance rises. Slammed by British business communitysaid Cable. However, he added that there were broader concerns about UK growth and the global economic situation, which was clouded by external factors such as China’s weak outlook.
Cable also downplays the UK mini-budget crisis 2022Then-Prime Minister Liz Truss’s announcement of sweeping tax cuts triggered huge swings in the bond market.
“The Truss moment is when a prime minister recklessly jumps into the dark and dramatically increases the budget deficit, assuming that will somehow spark economic growth. Well, that’s clearly not what happened this time. The debate is about whether they did Enough austerity and whether they were implemented in the right way, but that’s a different kind of question,” Cable told CNBC.
This sentiment was echoed broadly in the broader analysis. Bank of America strategists called comparisons to the mini-budget “overblown” and noted that the bar for the Bank of England to intervene in gilt markets as it did then was high.
Capital Economics said last week’s rise in UK government bond yields was an economic headwind, but not a crisis, and was smaller and slower than after the mini-budget announcement; David Brooks, head of policy at consulting firm Broadstone (David Brooks) said there does not appear to be any “systemic problem” in the economy. Liability-driven investment (LDI) funds the biggest concern in 2022.
