The pound and UK government borrowing costs have experienced some stabilisation following a period of upheaval. The currency initially grew somewhat early on Tuesday but then dropped back under $1.22, a figure close to its lowest since November 2023. Meanwhile, interest rate measures for UK government borrowing experienced a slight decline, although they still remained at around their highest levels since 2008. Chancellor Rachel Reeves will face some scrutiny in the Commons later in the day as Conservatives accuse her of failing to tackle the financial issues affecting the markets.
A number of countries have experienced rising borrowing costs, leading some to criticize the decisions made in last year’s budget that seem to have made the UK more vulnerable. Sir Keir Starmer, the current Prime Minister, has commended Reeves’ efforts, but the Conservative party have claimed that she is ‘hanging on by her fingernails’ due to current economic pressures. Reeves herself has defended her decision to visit China over the weekend, stating that it will have economic benefits for the country. However, the Conservative party has criticised her for ‘fleeing’ during a period of market uncertainty.
Governments typically borrow money by selling bonds, which are usually purchased by large investors, such as pension funds. UK government bonds are known as gilts. The yield on the 10-year gilt, for example, which is the interest rate at which the government pays back a ten-year-long loan to investors, fell slightly to 4.87% on Tuesday, while the 30-year gilt yield also declined, coming down to 5.42% from 5.44% on Monday. Rising bond costs have also been experienced in Germany, France, Spain and Italy, with some experts suggesting that investors may be predicting that US President-elect Donald Trump’s tariffs will cause an increase in US inflation and therefore high interest rates globally.
Nina Skero, CEO of the Centre for Economics and Business Research, discussed the situation, saying that for both the pound and gilts and there had been a “relatively dramatic couple of weeks”. She suggested that specific problems for the UK were caused by a “delayed response to the very heavy tax and spend in the Budget” and that they would have to wait possibly months or even quarters to see the full impact. Retailers and economists have also warned that certain measures introduced in the Budget, such as the rise in employers’ National Insurance contributions, will stimulate inflation, although Skero noted that the market’s response to former Prime Minister Liz Truss’ “mini” Budget of 2022 was even greater than the current situation
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