Uk Under Pressure - Not Helping - Bloomberg9 Jan 2025 12:19
UK under pressure
Higher interest rates, all things equal, typically lead to a strengthening currency. Yet the surge in gilt yields this week has been accompanied by a slide in the pound, possibly indicating capital flight as investors fret about persistent inflationary pressures and fiscal sustainability.
Britain’s markets are at the forefront of a global rout sparked by Donald Trump’s latest threats to impose tariffs and worries that inflation will remain elevated for longer than expected.
The speed of the moves has drawn comparisons with the fallout from Liz Truss’s ill-fated mini-budget in 2022. In a measure of the extent of the anxiety, Wednesday was the busiest day for pound options trading since the currency slumped toward an all-time low during the Truss episode.
While market structure has been strengthened to prevent a crisis of that scale, the government’s escalating debt burden is once again a source of concern for investors.
A more apt comparison would be to the 1976 crisis that forced the government to ask the International Monetary Fund for a bailout, according to former Bank of England rate-setter Martin Weale.
If sentiment doesn’t change, the Labour government may have to resort to austerity to reassure markets that it will address the escalating debt burden, he says. Chancellor of the Exchequer Rachel Reeves will favor fresh cuts to public spending over tax hikes if the rise in borrowing costs wipe out her dwindling £9.9 billion of fiscal headroom, according to people familiar with her plans.
“We haven’t really seen the toxic combination of a sharp fall in sterling and long-term interest rates going up since 1976. That led to the IMF bailout,” said Weale, now professor of economics at King’s College London. “So far we are not in that position but it must be one of the chancellor’s nightmares
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