Rachel Reeves, the finance minister, will address parliament for the first time since Britain was rocked by market turmoil on Tuesday, one of several potential flashpoints for the Labor leadership this week.
Ms Reeves’ appearance in the House of Commons was officially supposed to be to make a statement on her recent trip to China, but opposition parties have warned her about surging gold yields, which could put her in breach of her own fiscal rules. It allows you to ask questions. Further danger lurks in the coming days, with bond sales and important economic updates threatening to trigger a crisis.
Sterling has fallen by about 4 cents against the dollar in less than a week amid worries about problems in the gold market, as well as the country’s mounting debt, anemic growth and stubborn price pressures.
Britain’s finance minister is trying to project calm in the face of market turmoil, but Wednesday’s inflation overshoot and Thursday’s weaker-than-expected growth figures could even force the Bank of England to intervene. Economists have warned that there is. Such a scenario would increase pressure on Mr Reeves to raise taxes and cut spending, putting the entire economic policy of Prime Minister Keir Starmer’s Labor Party at risk.
Reeves said the UK is at the center of a global bond market storm, with signs of an overheating US economy and the threat of another damaging trade war after President-elect Donald Trump takes office on January 20. We are working on this. She’s also paying the price. The cost of leaving just £9.9bn of headroom under the key fiscal rule in October’s Budget – that day-to-day spending must be covered by tax revenue – is the margin. That is estimated to have been wiped out by higher debt interest charges.
The yield on 10-year government bonds, the leading measure of the UK government’s borrowing costs, has been lowered by concerns that the country is sliding into stagflation, a disastrous combination of high inflation and low growth. It rose to the highest level in 17 years.
Vicky Price, chief economic adviser at the Center for Economics and Business Research, said Wednesday’s spike in UK inflation was likely to “further push yields higher”. The Bank of England “needs to send a signal or the market could go on strike. They could discontinue active QT,” Threadneedle Street said in the year to October. He also mentioned the planned sale of 13 billion pounds of gold leaf.
Last month, BoE Governor Andrew Bailey suggested four half-point rate cuts were likely in 2025, but as of Monday, markets had expected only one across-the-board rate cut. Mr Price said the BOE needed to push back against such market pricing, which would restore some of the £10bn of fiscal space lost to rising borrowing costs since Labour’s October budget. .
At current market rates, Reeves will need to find new savings. Mr. Price suggested Mr. Reeves should “defer some of the spending until later years” and “accelerate some of the cuts” to get the finances under control.
Still, not everyone agrees that the BOE should intervene in market turmoil. Deanne Julius, the BoE’s former rate-setter, told Bloomberg that it was “dangerous to think that the market is miscalibrating” the pressure on Britain, and warned against any intervention by the BoE. “They just have to get through it,” she said.
The threat of inflation is likely to worsen further as Mr Reeves’s £26bn increase in National Insurance (payroll tax) comes into effect in April, at which point businesses will be forced to pass the costs on to customers at higher prices. He added that there is a possibility that they will start to do so. The weaker pound is also exacerbating inflation.
Dan Hanson, chief UK economist at Bloomberg Economics, said the BoE should not rush into action. “It will take a little more than three weeks until February interest rates are decided,” he said. “If the banks want to say something, now is the time to say it.”
Reeves responded to market developments during a visit to China, saying his fiscal rules were “non-negotiable” and that he would take action to ensure they were met, but he did not provide more specifics. Didn’t mention it. Officials said privately that the prime minister was considering spending cuts to stabilize the economy.
Simon French, chief economist at Panmure Liberum, said the Treasury should “commit to saving in case we need it on March 26”, when the Office for Budget Responsibility updates the Chancellor’s outlook. . If borrowing costs don’t come down, Reeves will have to find money elsewhere.
Britain’s opposition parties are calling on the prime minister to intervene formally to deal with the situation. For now, Reeves plans to stick to his previously announced schedule of releasing a set-piece economic statement on March 26, the people said.
Deputy Prime Minister Darren Jones told colleagues last week that markets “continue to function in an orderly manner”, citing rising bond yields around the world.
In addition to Tuesday’s Commons statement, Reeves will meet with a group of UK regulators this week to urge further efforts to boost economic growth. He is also scheduled to give a talk focused on growth in the last week of January.
Mr Reeves received overwhelming support from Prime Minister Keir Starmer on Monday, who said he had “full confidence” in her.
“Rachel Reeves is doing a fantastic job,” Starmer told a press conference after giving a talk on artificial intelligence in London. “We have set fiscal rules that absolutely need to be followed if we are to achieve the stability we want.”
This article was generated from an automated news agency feed without modifications to the text.
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