JP Morgan: UK policy credibility ‘coming under pressure’
JP Morgan warned that UK policy credibility is “coming under pressure” amid continuing turmoil in the gilt market and fears about slow growth.
Gilt yields, which reflect the cost of government borrowing, have increased significantly in recent weeks.
Yields on both the 10-year and the 30-year gilts have climbed for six consecutive days, leaving the yield on the 10-year bond at a post-2008 high and the yield on the 30-year at a post-1998 high.
Gilt yields have largely moved in line with US Treasury yields, as traders have concluded that interest rates need to be higher globally in order to tame inflation.
But analysts at JP Morgan said market moves in the UK had been “exacerbated” by concerns about an “expansionary fiscal policy” which will push up on inflation.
This reflects the anticipated impact of the government’s first Budget, in which Chancellor Rachel Reeves topped up spending plans by around £70bn annually for the next five years.
“For now, the move has been orderly and there is no real case for the BoE to intervene on financial stability grounds as it did after the 2022 mini-Budget,” the analysts at JP Morgan wrote.
“However, the combination of higher borrowing costs and notably weaker growth of late will push the deficit path higher and limit headroom around the government’s own fiscal rules.”
Reports suggest that the Treasury is preparing “ruthless” public spending cuts in order to ensure that the government stays on the right side of its fiscal rules.
The Prime Minister’s official spokesman confirmed yesterday that “nothing (was) off the table when it comes to delivering value for money for taxpayers”.
Faster interest rate cuts would help to ease the pressure on the government, but the JP Morgan analysts pointed out that nearly all surveys of inflation expectations were “rising significantly”.
The pound has also weakened in the sell-off, putting up the price of imports. More rapid rate cuts would only further weaken sterling, particularly given hawkish expectations for the Fed.
“The Bank of England has limited options,” they wrote. “We expect the Bank will cut in February but find it hard to commit to a faster easing absent a clear recession taking place.”