The cut in interest rates was meant to take the heat off the economy, bolster confidence for business and provide respite to homeowners.
Instead, we are seeing a highly volatile gilts market with traders selling big chunks of 30-year bonds, which in turn is pushing up the price of government borrowing to levels not seen for 27 years – and to levels way higher than during the so-called Liz Truss crisis when her administration was blamed for crashing the economy.
Over the last few days, yields on 30-year bonds have risen above 5.62 per cent while the yield on the benchmark ten-year bonds has climbed to more than 4.76 per cent, the highest since May.
Normally, a rate cut would depress gilt yields. So even though we are in the tail-end days of August, when markets are always thinner, there’s no doubt what’s going on.
Traders and investors are sending the Government a pretty stark message: We don’t believe that your economic strategy is working out.
You can’t blame them. Inflation is climbing, as today’s figures are expected to show, and growth is flatlining while figures for the public finances out tomorrow are also expected to show further rises in government debt.
Not only does the UK have the highest level of inflation in the G7 but borrowing costs are the highest too.
And interest rates are also still the highest despite recent cuts and are unlikely to be trimmed any further. Not a great outlook.
Businesses are still reporting heavy job losses while insolvencies are creeping up month on month, reaching 2,081 in July.
Over the last year the construction industry has seen the highest number of insolvencies at 3,984, making up 17 per cent of all industry cases, which is disappointing as housebuilding and infrastructure projects were to be a government priority.
The bond markets don’t like what they see, and are sending the strongest of signals to the Chancellor that something has to give if she is to plug her £50billion black hole – slash public spending or raise taxes.
Either way Rachel Reeves will have to break her word on not raising taxes or breaking her own fiscal rules, neither of which is politically palatable.
One of the City’s most thoughtful economists, Panmure Liberum’s Simon French, has an intriguing take on what Reeves should do next.
In a recent tweet, French argues that if the Prime Minister won’t back his Chancellor and her instincts on the ‘optimal split of fiscal repair undertaken by department spending control/welfare/tax increases’, then Reeves should resign in ‘dignified protest’.
French, who is usually non-partisan, also says it will be interesting to see ‘how many Labour backbenchers – currently showing economically naive attitudes to debt, inflation & growth – respond to the frequent signals coming from the bond market’.
In short, what French suggests is that Reeves can only get a grip on public spending if Starmer stands up to Labour rebels who recently forced through U-turns on winter fuel payments and other welfare reforms.
He’s right, of course. And maybe those tears she shed during PMQs in the Commons were out of sheer frustration? Rather than give in to the rebels, she should find her inner Iron Lady.
And rather than desperately try to find new ways to pluck the taxpayer, which will depress consumer and business confidence, how about pushing through tax reforms which will invigorate growth? Now that would be worth a fight.
If she can’t, the Chancellor should fall on her sword. Resigning on principle would be a far better legacy than breaking every promise made in the run-up to the election about not raising taxes on working people, or indeed, boasting about being the first female Chancellor.
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