Chancellor of the Exchequer Rachel Reeves will speak in Parliament on Tuesday for the first time since Britain was rocked by market turbulence, one of several potential flashpoints for the Labor leadership this week.
Reeves' appearance in the House of Commons is officially intended to make a statement on the recent trip to China, but provides an opportunity for opposition parties to question her over a sharp rise in government bond yields, risking her violates its own budget rules. Even more dangers loom in the coming days, with government bond sales and crucial economic developments threatening to fuel the crisis.
In addition to problems in the government bond market, the pound has also fallen about four cents against the dollar in less than a week, amid widespread concerns about the country's debt pile, anemic growth and persistent price pressures.
Although Britain's Chancellor of the Exchequer has tried to project a calm personality in the face of market turmoil, an overshoot in inflation on Wednesday combined with weaker-than-expected growth figures on Thursday could even force the Bank of England to intervene, warned economists. Such a scenario would increase pressure on Reeves to raise taxes or cut spending, and jeopardize the entire economic agenda of Prime Minister Keir Starmer's Labor Party.
Reeves is grappling with Britain being at the center of a storm in global bond markets, driven by signs of an overheating US economy and the threat of a new round of damaging trade wars following the inauguration of incoming President Donald Trump on January 20. the price for leaving just £9.9 billion of headroom in breach of her key fiscal rule in her October budget – which requires day-to-day spending to be covered by tax revenue – a margin estimated to have been wiped out by higher interest rates on debts.
The yield on 10-year government bonds, a typical way of measuring the British government's borrowing costs, has risen to a 17-year high on fears that the country is in the grip of 'stagflation', the gloomy combination of high inflation and weak growth.
A shocking spike in British inflation on Wednesday is likely to push interest rates “further higher”, according to Vicky Pryce, chief economic adviser at the Center for Economics and Business Research. The Bank of England “should send a signal or the markets may go on strike. They could stop doing active QT,” she said, referring to Threadneedle Street's planned £13 billion sale of government bonds in the year to October.
Last month, BOE Governor Andrew Bailey indicated that four quarter-point rate cuts were likely by 2025. But on Monday, markets were predicting just one full cut. Pryce said the BOE should oppose such market prices, which would restore some of the £10 billion budgetary space that has been wiped out by higher borrowing costs since Labour's October budget.
At current market rates, Reeves will have to find new savings. Pryce suggested Reeves should “defer some of her spending until later years” and “accelerate some cuts” to get a handle on the government's finances.
Still, not everyone agrees that the BOE should intervene in the market disputes. DeAnne Julius, a former BOE rate setter, told Bloomberg that it would be “dangerous to think that markets are miscalibrating pressure on Britain” and warned against any BOE intervention. “They just have to get on with it,” she said.
Inflation threats could worsen with Reeves' £26 billion increase in national insurance, a payroll tax, coming into effect in April, at which point companies could start passing on the costs to customers in higher prices, she added. The weaker pound also worsens inflation.
Dan Hanson, chief U.K. economist at Bloomberg Economics, said the BOE should not rush into action. “The February interest rate decision takes just over three weeks,” he said. “If the Bank wants to say something, that is the time to do it.”
Commenting on market moves during her trip to China, Reeves said her budget rules are “non-negotiable” and that she would take action to ensure they are adhered to, without getting more specific. Privately, people familiar with the matter say the chancellor is considering cuts to stabilize the budget situation.
Simon French, chief economist at Panmure Liberum, said the Treasury should be “working on savings in case they are needed on March 26,” when the Office for Budget Responsibility updates the chancellor's forecasts. If borrowing costs don't come back, Reeves will have to get money from somewhere.
Britain's opposition political parties have called on the chancellor to intervene formally earlier to address the situation. For now, Reeves plans to stick to the previously announced timeline of making a firm economic statement on March 26, according to people familiar with the matter.
Her deputy Darren Jones told colleagues in parliament last week that markets “continue to function in an orderly manner” and cited rising bond yields around the world.
In addition to her Commons statement on Tuesday, Reeves will meet a group of British regulators this week to push them to do more to facilitate economic growth. She will also deliver a growth-oriented speech in the last week of January.
Reeves received the full backing of Prime Minister Keir Starmer on Monday, who said he had “complete confidence” in his chancellor.
“Rachel Reeves is doing a fantastic job,” Starmer told reporters at a press conference after a speech on artificial intelligence in London. “We have established budget rules that we absolutely adhere to, because they are necessary to provide the stability we want.”
This article was generated from an automated feed from a news agency without any changes to the text.
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