Bank governor urges chancellor to use budget to reassure markets amid bond turmoil
Andrew Bailey has advised Chancellor John Healey to ensure the upcoming budget is credible to reassure financial markets following a rise in UK borrowing costs.
Andrew Bailey has advised Chancellor John Healey to ensure the upcoming budget is credible to reassure financial markets following a rise in UK borrowing costs.
Bank of England governor Andrew Bailey has advised Chancellor John Healey to ensure the upcoming budget is credible to reassure financial markets following a rise in UK borrowing costs. Speaking at the Istanbul Economic Forum, Mr Bailey told The Independent that lower growth and frequent supply shocks undermine state finances while adding to the demand for government assistance.
Mr Bailey stated that governments find it harder to sustain debt when shocks are frequent and growth is weak. According to The Guardian, he urged the Chancellor to ensure fiscal policy is seen as credible by financial markets, stating: 'Whatever the stance of fiscal policy, it must be credible and be seen as such by financial markets.'
UK medium-term borrowing costs have reached a 19-year high. Yields on 20-year and 30-year UK government bonds (gilts) have risen to their highest levels since 1998, according to The Guardian. At lunchtime in London, the 10-year UK government bond yield stood at 5.515%, while The Independent reported a high point of 5.53% for the 10-year gilt during the day.
Analysts believe further conflict in the Middle East could push bond yields up again due to inflation concerns, and questions remain as to whether the Iran war will continue to restrict energy supply and impact growth. The benchmark oil price has seen a 5% increase, reaching $105.3 per barrel.
The Chancellor faces reduced fiscal headroom due to inflation and higher borrowing costs, according to The Independent. While Rachel Reeves built a £24bn buffer against fiscal rules in March, the fiscal headroom estimated by EY in March was £23.6bn. The current estimated fiscal headroom is £11.3bn, according to EY via The Independent.
The Chancellor is expected to raise taxes to rebuild the fiscal cushion and fund policy interventions, such as a six-month VAT cut on electricity. However, Andrew Wishart of Berenberg Bank told The Guardian that increasing taxation to ensure the surplus remains near the level predicted in the March forecast 'would do unnecessary damage to economic incentives.'
The International Monetary Fund (IMF) managing director, Kristalina Georgieva, has also urged governments to tighten spending in response to rising yields, saying: 'we cannot keep delaying necessary policy action – you have the tools, now have the wisdom to use them.'
Rising bond yields increase borrowing costs for the government, which can impact homeowners and businesses. Last week, diesel prices at UK pumps reached £2 a litre.
The Chancellor is set to make a tax and spending announcement on 28 October. Meanwhile, it is broadly anticipated that the Bank of England will increase interest rates during its meeting in November.