Bank of England must raise interest rates, says chief economist
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04:40pm
Only a fiscal crisis will address UK’s political issues, economist warns
Only a fiscal crisis will prompt the UK to address its longstanding political and borrowing problems, a senior economist has warned.
Jagjit S. Chadha, an economist at the University of Cambridge, warned yesterday on social media that bond markets were not only responding to fears around debt amongst all wealthy countries but also to “political sceloris and fiscal incontinence” in the UK specifically.
Paul Mortimer-Lee, a research fellow at National Institute of Economic and Social Research, added that it was unlikely that any government would willingly address such issues without a fiscal crisis to respond to.
“The only way we will address the issues is if we have a fiscal crisis,” Mr Lee said in a response on social media earlier today.
” Since 2016, we’ve had seven prime ministers and eight Chancellors. Which government is going to think long term in those circumstances? The political will only emerge in a crisis. Come on bond vigilantes, do your stuff and do us a favour!!!!”
04:02pm
Heavy government borrowing could see yields rise further
Heavy government borrowing could lead bond yields to rise further, a market watcher at one of the UK’s top funds has warned.
Gemma Cairns-Smith, an Investment Specialist at Ruffer, said that “persistent fiscal deficits, heavy government borrowing and growing competition for capital” could place continuing upward pressure on long-term yields and that this might increase pressure on policymakers to intervene in the market.
“The US Treasury’s decision to increase buybacks may be an early sign of that tension. It is too soon to know whether this is simply debt management or something more significant, but it raises the prospect that policymakers may increasingly seek to lean against further increases in yields,” she added.
Ms Cairns-Smith said that the recent rise in yields was driven mainly by stickier inflation, and stronger growth which has led markets to expect interest rates to remain higher for longer.
03:30pm
Inflation-linked bonds ‘disproportionately’ push up UK borrowing costs
Britain’s high number of inflation linked bonds makes the country more susceptible to swings in energy prices, a bond trader has warned.
Robert Dishner, senior portfolio manager at Neuberger, UK borrowing costs could rise again if the Chancellor does not set out a “solid plan” for how he will manage the public finances in the Budget next month.
He said this was all the more important given the rise in energy prices since the start of the Iran war, which deal a heavy blow to inflation linked debt.
Mr Dishner said: “The UK carries a higher percentage of government debt in inflation-linked bonds. So the energy moves disproportionately impact the UK, relative to other markets.
“The autumn Budget is going to be closely scrutinised and the market will want to see well-grounded plans. That could go a long way to helping diffuse those fiscal concerns.
“But it is somewhat binary, as if there isn’t a solid plan, we could see premiums rise again.
“A drop in energy prices by definition should also help the UK disproportionately more.”
03:12pm
Interest rates to be cut by April, says ING
The Bank of England will cut interest rates at least once over the next year despite concerns about higher inflation, an economist has said.
James Smith of Dutch bank ING said the inflation shock from the Iran war “hasn’t been as bad as it could have been”.
The economy is also likely to slow down in the second half of the year, as it has done every year since 2022, he said.
Combined with a weak construction sector, he said this would mean the Bank of England can take a more “dovish” tone – meaning it will lean more towards looser financial conditions.
He said: “Barring a sustained and material spike in energy prices, we think by early next year the Bank of England will be comfortable pivoting in a more dovish direction.
“A lot will depend on October’s budget. But for now, we’re pencilling in a rate cut for April 2027.”
03:10pm
Interest rate on inflation linked-bonds highest since 2001
Britain has paid the highest rate to borrow in a quarter of a century using inflation-protected bonds, as concerns about runaway spending spread through markets.
An auction for so-called “linkers” – bonds whose interest rates are linked to price rises – saw the Government agree to pay investors 2.496pc on top of the rate of inflation, in exchange for lending £900m to the Treasury.
The last time index-linked bonds were sold with such a high return was in April 2001, during Sir Tony Blair’s first term in office.
It will raise fresh fears about the state of public finances amid a global crunch in bond markets.
Borrowing costs around the world have surged to multi-decade highs in recent days as investors fret about huge national debts, inflation and runaway spending.
The UK has faced the steepest increase in bond yields of any G7 economy, driven by nervousness about Andy Burnham and Chancellor John Healey’s upcoming Budget.
Emma Moriarty, portfolio manager at CG Asset Management, said: “We know that taxes have to go up – which will likely lower growth, and can’t see any political constituency in favour of making the large-scale spending cuts needed to narrow the deficit.
“Until the Government communicates a tractable solution to this, gilt markets will continue to price in a deterioration. We are, unfortunately, still in hock to the bond markets.”
Thomas Pugh, chief economist at RSM UK, said the high interest on the UK “linkers” reflected concerns about the UK’s near-£3 trillion debt, inflation from the Iran war and concern over spending plans.
He said: “There seems to be very little recognition or willingness to take action at the political level.
“Here in the UK it looks almost certain that we will get more borrowing, further delaying the fiscal consolidation which the previous administration has pencilled in. There seems to be little fiscal credibility on offer.”
Index-linked bonds track inflation and were designed in the 1980s to give investors confidence that the British Government was serious about bringing the pace of price rises under control.
For decades, these bonds offered a good deal to the Treasury as creditors were happy to pay over the odds for inflation insurance while the rate of price rises remained low.
However, since the cost of living crisis, inflation has almost always run above the Bank of England’s target. As a result the Government has had to pay more than anticipated to bondholders, turning “linkers” from a benefit into a cost to the taxpayer.
While the rate offered in Thursday’s auction was high, appetite to lend to the UK remains strong. The interest rate on offer attracted £3.2bn of bids for £900m of debt.
02:48pm
Falling borrowing costs boost FTSE
The FTSE 100 has risen at its fastest pace since July over hopes for lower interest rates.
The UK’s main stock index – which has an international focus – climbed 1pc on Thursday in a broad relief rally in markets.
The cost of UK government borrowing has fallen at the fastest pace among major global economies after a turbulent start to the week.
US stocks have also jumped after Federal Reserve governor Christopher Waller suggested he could support interest rates staying the same later this month.
02:38pm
US stocks rise as bond turmoil eases
Wall Street rallied at the opening bell as government borrowing costs fell, loosening financial conditions.
Investors also latched onto comments from a Federal Reserve governor about interest rates.
The Nasdaq Composite rose 0.6pc to 26,381.93 after Christopher Waller said he was open to leaving interest rates unchanged this month – although he warned he would back higher rates if inflation was too high.
The Dow Jones Industrial Average climbed 0.8pc to 53,495.61 while the S&P 500 rose 0.5pc to 7,703.91.
02:30pm
Healey ‘should not try to tax his way to growth’
The Chancellor has been urged to avoid the temptation to try and tax his way to growing Britain’s economy in next month’s Budget.
Elisa Sofocli, a partner at business advisory firm Blick Rothenberg, urged John Healey not to raise taxes to fill the gap in the public finances left by the recent rise in borrowing costs.
She said: “The Government shouldn’t tax its way to growth.
“There will inevitably be pressure on the Chancellor, John Healey, to raise additional revenue via tax rises at the Autumn Budget as the fiscal position comes under more strain – with the cost of Government borrowing now at a twenty-eight year high.
“But every tax decision needs to be considered against its potential impact on economic growth.”
She added: “With the Chancellor expected to set out his fiscal priorities on Monday, businesses will be looking for more than a commitment to balancing the books. They need to understand how the Government intends to reconcile the need for additional revenue with its equally important ambition to grow the economy.”
She added: “There is a danger that tax becomes the easiest lever to pull when the public finances are under pressure.
“But repeatedly increasing taxes or adding complexity can create a drag on the very economic activity the Government is trying to encourage.”
02:06pm
French borrowing costs hit highest level since global financial crisis
France has been forced to offer buyers of its bonds the highest returns since the global financial crisis after the latest spike in borrowing costs.
The French Treasury had to sharply increase the interest rate offered in its latest sale of benchmark government bonds.
It underlines the concerns about the health of the public finances in Europe’s second largest economy ahead of a fierce budget and deficit debate in the run-up to next year’s presidential debate.
The rate on the sale of 10-year OAT bonds rose to 4.23pc at the monthly auction, up sharply from the 3.9pc offered in August and the highest rate since 2008.
It was also a steep increase from the 3.45pc seen just seven months ago in February, before the US and Israel launched airstrikes against Iran.
Since then surging energy prices have raised fears that central banks worldwide will have to raise interest rates to cool inflation.
Government bond yields have spiked in response as investors demand a higher payout for lending governments money.
It puts further pressure on Prime Minister Sebastien Lecornu as he tries to negotiate steep spending cuts for next year’s budget.
He aims to reduce a deficit that reached 5.1pc of GDP last year – one of the highest in the eurozone and above the 3pc limit set for EU members.
01:46pm
Fed governor considering higher rates
A governor at the Federal Reserve has said he would be prepared to back an increase in interest rates later this month if US inflation is higher than expected.
Christopher Waller said his decision on whether to back a hike in borrowing costs would be “heavily influenced” by August’s inflation figures for the world’s largest economy.
He told a Reuters event: “If there is continued progress toward our 2pc goal, then I am willing to support holding the policy rate at its current level.
“But if inflation comes in hot, I would consider a rate hike.”
US inflation fell from 3.5pc in June to 3.4pc in July.
However, traders are betting there is a 54oc chance the Fed will raise interest rates at its September meeting following recent US strikes on Iran.
Kevin Warsh, the Fed chairman, also indicated at his key Jackson Hole speech last week that his goal was to tame inflation, prompting many investors to bet on higher rates.
01:40pm
UK stocks rise as borrowing costs ease
The FTSE 100 has risen at its steepest rate in a fortnight after a rally in bond markets.
The UK’s flagship stock index climbed as much as 0.5pc as the recovery in bonds helped boost the mood among traders.
The domestically focused FTSE 250 rose 0.2pc.
Neil Birrell, chief investment officer at Premier Miton, said: “On a day when yields are falling it’s not surprising to see equites rally.”
01:25pm
Badenoch: Burnham will bankrupt Britain
Britain will go bankrupt under Andy Burnham, Kemi Badenoch has warned.
The Conservative Party leader said the Prime Minister risked running out of money by making too many promises and being unable to say no to government departments.
In a speech on Thursday morning, Mrs Badenoch set out her plans to increase defence spending to 3 per cent of gross domestic product by 2030 by slashing Britain’s welfare bill. Mr Burnham has so far declined to commit to the same target.
01:20pm
Borrowing costs fall further
The cost of government borrowing has fallen further in a recovery from the sharp rises earlier this week.
The yield on 10-year UK gilts fell from 5.23pc to 5.16pc, having climbed to a 19-year high of 5.29pc on Wednesday.
The declines were similar for two-year and 30-year gilts, as UK bonds are known.
12:41pm
Low energy prices are ‘biggest lever for growth’
Telegraph readers have urged Andy Burnham to pursue policies that will lower energy prices after the recent surge in borrowing costs triggered by higher oil prices.
Here is a selection of views from the comments section below and you can join the debate here.
12:09pm
Borrowing costs ‘to fall when AI bubble bursts’
A bursting of the AI bubble will rescue the Chancellor from higher borrowing costs as investors seek out the safety of government bonds, economists have suggested.
Capital Economics is forecasting that the yield on 10-year gilts – a benchmark for what the Treasury pays to borrow money – will fall from around 5.2pc to 4.25pc by the end of next year.
Joe Maher, a markets economist, said this would be helped by a shift out of stocks into bonds next year “when we expect the AI bubble to burst”.
He said: “We expect a ‘flight to safety’ into bonds to follow, just like after the dotcom bubble burst, albeit gilt yields may not fall by as much as back then.”
He added that he thinks John Healey will not loosen the public purse strings in the Budget over fears of a bond market backlash.
He said: “We think the most likely scenario is a ‘medium’-sized budget, in which most of the PM’s ambitious plans are delayed beyond this year’s Budget and borrowing rises only marginally.
“That said, continuing to kick the fiscal can down the road is only likely to delay rather than avert a fiscal reckoning, and a further flaring up in investors’ fiscal concerns poses a upside risk to our Gilt yield forecast.”
11:38am
Citi urges Healey to restore headroom to avoid higher borrowing costs
John Healey has been warned he faces further market turmoil unless he finds billions of pounds in tax rises or spending cuts to patch up the public finances.
Jamie Searle at investment bank Citi said the Chancellor needed to find ways to restore confidence in the Treasury’s management of the public purse amid a sharp rise in borrowing costs.
Mr Searle warned that higher borrowing costs in bond markets and rising expectations for the Bank of England’s base rate “could cut the current £23.6bn fiscal buffer by about £7-7.5bn” when the Office for Budget Responsibility publishes its forecasts in October.
He added: “Restoring headroom to the March baseline looks increasingly challenging. If it is allowed to slip, the gilt market may take it as a can-kick and hit to fiscal credibility.”
That in turn would risk another rise in borrowing costs, wreaking further harm on the finances, he warned.
It comes after a slump in global bond markets which has pushed the Government’s borrowing costs up to levels not seen in decades.
The turmoil threatens to blow a multi-billion-pound hole in Labour’s financial plans as it adds to the cost of paying interest on the near-£3 trillion national debt.
Economists at Capital Economics estimated up to £14bn had been wiped off the Chancellor’s headroom by the recent rises in borrowing costs.
The pressure eased slightly on Thursday, with the yield on 10-year government bonds falling to as low as 5.18pc, after hitting a 19-year high of 5.29pc on Wednesday.
11:15am
Wall Street subdued as oil prices rise
US stock markets were on track for a muted start despite Donald Trump suggesting his bombing in Iran was nearing an end.
The Nasdaq 100 was down 0.1pc in pre-market trading as the US president’s comments only temporarily caused a decline in oil prices.
Brent crude, the international benchmark, dropped as much as 1.7pc earlier to $94 a barrel but has since climbed back up to be 1.5pc higher on the day at more than $97.
The S&P 500 was on track for a flat start to trading, while Dow Jones Industrial Average was on course to rise 0.1pc.
10:47am
Mortgage borrowers face three interest rate rises
Traders are betting that the Bank of England will raise interest rates three times over the next year in the face of persistent levels of inflation.
Money markets are pricing in two rises in interest rates by March next year with a 93pc chance of a third by July 2027 after the recent rises in oil prices.
The derivatives trades have slightly improved after a drop in bond yields. Traders had on Wednesday been betting on a guarantee of three rate rises by July.
Three quarter point increases would take interest rates from 3.75pc to 4.5pc.
10:20am
Services sector sheds jobs for longest period on record
The dominant services sector of Britain’s economy has suffered its longest period of declining jobs on record.
Workforce levels have fallen for 23 consecutive months, the longest ever recorded by the closely watched S&P Global UK Services PMI, which began in 1996.
The private sector survey showed a the rate of inflation for services companies picked up in August, with 31pc of bosses reporting a rise in prices.
However, output from the sector rose to its highest level in four months, with optimism rising to the highest since February, despite uncertainty linked to the Middle East conflict.
Tim Moore, economics director at S&P Global Market Intelligence, said: “Business activity growth projections were still subdued in comparison to long-run trends amid lingering worries about inflationary pressures and geopolitical tensions.
“Higher fuel prices and transportation bills reignited overall input cost inflation in August. Moreover, the rate of output charge inflation in the service sector also accelerated for the first time in four months as businesses sought to protect their margins from
suppliers’ price hikes.
“Many firms have responded to intense cost inflation by tightening their staff recruitment policies.”
09:45am
Pound lacks direction in wake of bond sell-off
The value of the pound wavered as markets took a breather after the sell-off of UK bonds.
Sterling was up 0.1pc against the dollar to $1.35 after hitting a three-week low of $1.348 on Wednesday as Britain’s public finances came under pressure from a global rise in borrowing costs.
However, the pound was down 0.1pc against the euro at €1.163.
Mark Haefele, chief investment officer at UBS Global Wealth Management, suggested the UK currency could be poised to rally.
He said: “We… continue to view sterling positively, supported by improving confidence in UK assets, a more fiscally credible political backdrop, and the potential for investors to reduce still substantial short positions.”
09:22am
European stocks waver after bond rout
European stocks were mixed after three straight sessions of losses during a global bond sell-off.
The Continent-wide Stoxx 600 was up 0.1pc after hitting a one-month low on Wednesday, with Germany’s Dax up 0.1pc following a 1.7pc drop in oil prices.
However, France’s Cac 40 was down 0.2pc as Brent crude remained above $94 a barrel, amplifying concerns about persistent inflation.
The next major event for investors is Friday’s US non-farm payrolls report, which could indicate whether the Federal Reserve will press ahead with an interest rate rise this month.
08:57am
Badenoch: I will cut welfare to hit 3pc target on defence
Kemi Badenoch has set out plans to reduce the welfare bill to fund defence as Andy Burnham faces calls from the City to cut spending to bring down borrowing costs.
In a speech later today, the Conservative Party leader will set out “fully costed plans” to raise an extra £10bn for defence by the end of this parliament.
Our defence editor Danielle Sheridan has the details on Ms Badenoch’s direct challenge to the Chancellor.
08:34am
Bond market ‘looking for spending cuts’
Bond market investors want Andy Burnham to cut spending to put the fragile public finances on a more stable footing, an investment bank has warned.
Roger Lee, an analyst at Cavendish, said: “Increasingly, the bond market appears to be looking for spending cuts, amid concerns that higher taxes could weigh on economic growth.”
Mr Burnham refused to rule out more borrowing or putting up taxes in the Budget during his first Prime Minister’s Questions on Wednesday.
However, many in the City of London that he risks market turmoil unless he slashes spending.
Mr Lee added: “The Prime Minister may be new, but the fiscal arithmetic remains the same.”
My colleague Tim Wallace sets out why Mr Burnham must find a path to reduce borrowing costs.
08:12am
UK stocks flat as uncertainty lingers
The London stock market was not convinced by Donald Trump’s suggestion that strikes in Iran would not continue for “much longer”.
The FTSE 100 was flat at the start of trading at 10,753.07 while the FTSE 250 was also little changed at 24,345.20.
08:03am
UK borrowing costs fall
The cost of UK government borrowing edged lower as bond markets opened following the latest drop in oil prices.
The yield on 10-year gilts, as UK bonds are known, dropped by 0.03 percentage points to 5.19pc.
However, pressure remains on the public finances as it remains well above its level at the end of last week, when it ended Friday at 5.06pc.
07:44am
Gas prices ease as Trump signals end to strikes
The cost of wholesale gas has fallen after Donald Trump suggested the latest series of strikes against Iran were nearing their end.
Dutch TTF, the European benchmark, fell 1.1pc after surging by 10pc over the previous three trading days.
Prices had climbed after the US launched strikes on Iran. However, the US president said on Wednesday that does npt expect the US bombing campaign to last “much longer”.
The surge in energy prices had caused a downturn in stock and bond markets, with the latter increasing pressure on public finances.
European gas prices are more than double their levels of a year ago, renewing inflation pressures on the economy.
Jim Reid, an analyst at Deutsche Bank, said: “The continent’s exposure to natural gas prices meant bonds and equities took a fresh hit.
“With investors pricing in a protracted period of high gas prices, that had knock-on effects for assets across Europe, which faces much higher natural gas prices than the US.”
07:22am
Good morning
Thanks for joining me. Government borrowing costs edged lower on Thursday as Andy Burnham continues to face scrutiny over the public finances.
The yield on 10-year US treasury bonds – considered a benchmark for what governments pay to borrow money – declined slightly to 4.78pc on Thursday after a drop in oil prices.
Pre-market trading of bonds in Britain, France and Germany suggested the market was poised to rally after a brutal first half of the week.
However, Mr Burnham and Chancellor John Healey remain under intense pressure, with analysts estimating that as much as half of the country’s fiscal headroom has been wiped out by the jump in bond yields.
Borrowing costs surged after a jump in oil prices caused by fresh strikes between the US and Iran.
The yield on 10-year gilts, as UK bonds are known, hit levels not seen since the global financial crisis in 2007, while longer-term debt costs hit their highest point since 1998.
It means the Chancellor will have less room for manoeuvre in the Budget next month, with some economists predicting the rise in borrowing costs has wiped out up to £14bn of breathing room.
The rise in bond yields across major economies had deepened concerns about deteriorating financial conditions.
Central banks in the US and Europe are increasingly expected to raise interest rates this month to combat inflation caused by the Iran war, although the Bank of England is expected to hold rates steady for now.
Gavin Friend, an analyst at NAB, said: “If this war were to be put to bed, then that would certainly be something very positive to bring yields back down again across the board.” Here is what you need to know.
5 things to start your day
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City warns Burnham of borrowing shock unless he slashes spending | Prime Minister urged to scrap state pensions triple lock after recent surge in bond yields
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This bond market crisis means Burnham may need to cut, not spend | As the Prime Minister’s first Budget approaches, he must find a path to reduce borrowing costs
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Gordon Brown: Property is already ‘heavily’ taxed | Burnham should be ‘very careful’ of imposing further levies on wealth, warns former Labour PM
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Trump backs OpenAI in copyright battle with New York Times | Blocking tech firms from using protected work threatens national security, government lawyers warn
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Number of children growing up in workless homes hits 1.5m | Labour blamed for ‘job-killing policies’ as fears rise over a generation at risk of unemployment
What happened overnight
Oil prices slipped, helping boost stocks and bonds.
Renewed fighting between the US and Iran pushed oil prices sharply higher earlier in the week.
However, Brent crude was trading near $94 a barrel after Donald Trump said he does not expect the US bombing campaign to last “much longer”.
Tokyo’s Nikkei 225 advanced 0.2pc to 64,455.83. Among major gainers, OpenAI investor SoftBank Group rose 2.9pc, memory chipmaker Kioxia rose 0.6pc, and chip equipment manufacturer Tokyo Electron gained 0.8pc.
South Korea’s Kospi rose 1.4pc to 6,656.81. Samsung was 1.3pc higher, while memory chipmaker SK Hynix was up 1.4pc.
In Hong Kong, the Hang Seng edged 0.1pc higher, to 25,344.80. The Shanghai Composite index climbed 0.4pc to 3,958.79.
Australia’s S&P/ASX 200 gained 0.5pc to 9,025.10.
The Taiex in Taiwan rose 0.6pc, while India’s Sensex climbed 0.3pc.
It comes after Wall Street bounced back after its sharp sell-off at the start of September, as investors snapped up shares that had fallen in recent days.
The S&P 500 rose, with almost 350 companies ending higher. Dell was among the biggest winners, jumping 14pc after giving an upbeat outlook, while investors were also looking ahead to results from chipmaker Broadcom.
The recovery came despite continued concerns over inflation, with oil prices remaining high as fighting between the US and Iran escalated. Brent crude briefly climbed close to $97 a barrel before easing back after Donald Trump said he did not expect the renewed bombing campaign to last “too long”.
US government bond yields were little changed after surging to their highest levels in several years earlier in the week.
Investors also got a mixed picture from the Federal Reserve’s latest assessment of the US economy. Economic activity increased modestly over the past two months, helped by strong demand from data centres, while companies added jobs at a slower pace in August.
The figures come ahead of Friday’s closely watched US jobs report, which could influence expectations for the next move in interest rates.