Britain’s Borrowing Costs Soar Amid Inflation Fears
Chancellor Rachel Reeves is facing a daunting challenge as her record tax hike pushes up Britain’s borrowing costs, reigniting concerns about inflation. With two-thirds of her £9.9bn borrowing buffer already wiped out, economists warn that any further increase could force her to raise taxes or slash spending as early as March.
A Wafer-Thin Buffer
Reeves left herself little room to maneuver, with a new rule requiring her to balance day-to-day spending within three years. The Office for Budget Responsibility (OBR) had assumed interest rates would average 3.6% until the end of the decade, but market pricing now suggests rates will remain above 4% for much of the next three years.
Inflation Concerns
Inflation, currently at 2.6%, could rise to 3% next year, leaving investors nervous about UK debt. The world’s biggest bank, JP Morgan Asset Management, is shunning UK gilts due to fears that Reeves’ record increases in the minimum wage and National Insurance have stoked inflation.
Uncertainty Over Wage Increases
Seamus MacGorain, a managing director at JP Morgan, expressed concerns about the magnitude of next year’s wage increases and their impact on prices. He believes the UK is an attractive market, but uncertainty remains about whether prices will come down.
Bank of England Warns of Overheating
The Bank of England warned that employers are responding to the Chancellor’s £25bn increase in employer National Insurance contributions by raising prices, signaling that interest rates may remain higher for longer to prevent the economy from overheating.
Minimum Wage Rise
The Government announced a 6.7% rise in the minimum wage next April, with steeper increases for younger workers. This could lead to a fresh wave of price rises, according to Pantheon Macroeconomics.
Spring of Next Year Crucial
Developments next spring will determine whether JP Morgan starts buying gilts again. MacGorain believes the spring will be a critical moment, as prices in the UK reset on a fiscal year-end basis, and investors will see if inflation comes down or remains persistent.
Interest Rate Expectations
Investors now expect the Bank of England to cut rates just twice in 2025, compared to at least four times ahead of Reeves’ maiden Budget. The Bank held rates at 4.75% in December, and its caution has made sense given the uncertainty surrounding inflation.
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