Borrowing costs surge and sterling slides as confidence in UK declines

It’s been a choppy start to the year for markets buffeted by sharp rises in yields amidst concern over the impact of possible tariffs from a new Trump administration and a weak stagflationary economic outlook.  

This backdrop is particularly troubling given that central banks want to remain committed to further rate cuts but concerns over sticky inflation are complicating the backdrop considerably.

Last night we got a look at the latest Fed minutes which saw some dissent on the decision to cut rates by another 25bps last month however there wasn’t much in them that we didn’t already know with concerns about rising inflation risk the key takeaway here as rate cuts in 2025 continue to get priced out.

These concerns over sticky inflation have been reflected in a sharp rise in global yields across the board, which pose an even bigger problem for the UK which saw the 30-year bond yield hit its highest levels this century, while the 10-year yield rose to levels last seen in 2008, while the pound sank to its lowest level; against the US dollar since April last year.

This poses an enormous problem for the Chancellor given that the increase in debt costs, blowing a huge hole in her budget calculations with the usual chorus of economists claiming that she will be forced to come back and raise taxes further later this year if the situation doesn’t improve.

Excuse me? It’s the tax rises announced in the budget last year that have done so much to blow a hole in consumer and business confidence in the last few months and the solution to this from some economists is to call for more of the same?

They say the definition of insanity is doing the same thing over and over and expecting a different result. This would be no different.

The Chancellor’s claims of a £22bn black hole have already been exposed as the fiction that they are given the amount of money set aside for public sector pay rises, along with the £22bn on so-called carbon capture projects, and a host of other questionable spending commitments. There is plenty of room for spending cuts, and this is where the axe needs to fall and not on more spiteful tax increases that suck demand out of the economy, and the private sector especially.  

The rise in yields seen since August when the BOE started cutting rates, has seen yields surge across the curve with the 5-year up over 100bps from its lows with the potential to inflict further pain on an already slowing housing market.

While we can probably expect to see the Bank of England cut rates again next month, after the 6-3 split last month, that may not offer the respite that markets want. With the pound sliding on FX markets inflation could take much longer to come down given how a weak pound imports price pressure.

With wages and service sector inflation still up near 5% the Bank of England is likely to be reluctant to cut rates too much even in the face of a stagnant economy.

The new government can talk all it likes about fixing the foundations, and making the UK the fastest growing economy in the G7. 6 months in and the foundations are crumbling and we are languishing near the bottom.

That sort of performance gets Premier League managers the sack. Will Rachel Reeves suffer a similar outcome, and even if she does who would replace her?

The list of any potential replacements on the government front bench doesn’t exactly inspire confidence.