Government borrowing costs rose sharply on Thursday, partially erasing gains made in recent months, in another blow to Rachel Reeves’ Budget plans.
It comes as Reeves faces fresh scrutiny over her failure to obtain a landlord licence for her family home in South London, putting her position as Chancellor in jeopardy.
The Prime Minister’s ethics adviser is reconsidering the case after what Downing Street called ‘A review of emails sent and received by the Chancellor’s husband.’
Reeves is preparing to deliver a Budget on 26 November which could potentially heap more taxes on the country’s landlords.
Gilt yields – the interest paid on Government debt – are under sharp focus ahead of the Budget as sky-high debt servicing costs erode the Chancellor’s fiscal headroom and her capacity to spend elsewhere.
The impact of higher debt servicing costs could also make it necessary for Reeves to consider more aggressive tax hikes – including on people with buy-to-let investments and wealth in general.
It has previously been reported that Reeves was considering charging landlords National Insurance on the money they make from rent, in a bid to close Britain’s £20billion fiscal black hole.
Under pressure: The impact of higher debt servicing costs could make it necessary for Reeves to consider more aggressive tax hikes
Gilts faced selling pressure on Thursday as comments from Federal Reserve chair Jerome Powell overnight weighed on expectations for more interest rate cuts.
Stocks, bond and gold all fell in response to the Fed’s ‘hawkish’ rate cut, with another one in December no longer viewed as a certainty.
Gilts fell across all durations, with five-, 10- and 30-year yields up by 5 basis points each by mid-afternoon in London. Longer duration gilts recovered ground later in the afternoon for yields to trade 3bps to 4bps higher for the day.
Landlords in Rachel Reeves’ former home borough of Southwark must obtain a licence or risk prosecution. Tenants can sometimes claim money back if this happens.
It appears that could be up to £38,000 in the case of Ms Reeves – who has enthusiastically backed similar landlord licences in her own Leeds constituency.
Despite previous cases going to court, the Prime Minister insisted the matter was closed within hours of the news breaking on Wednesday night.
However, on Thursday afternoon, Downing Street reopened the prospect of Sir Laurie launching a formal probe into Ms Reeves’ rental arrangements when revealing the ‘new information’ was being looked at.
Ms Reeves’ husband, Nicholas Joicey, is a senior official at the Department for Environment, Food and Rural Affairs.
Downing Street declined to say whether she had broken the ministerial code during a bad-tempered briefing with political journalists this morning, but denied there had been a ‘stitch-up’ to avoid panicking the markets.
What does gilt move mean for interest rates?
The latest move in gilt yields will frustrate the Chancellor after a sizeable fall in Government borrowing costs over the last month.
Long-term borrowing costs have been elevated for some time, amid market concerns about UK fiscal strength and the view that higher inflation will result in higher-for-longer interest rates.
Goldman Sachs believes the Bank of England will cut base rate by 25bps to 3.75 per cent next week, following growing evidence of weak economic output.
However, market consensus suggest the BoE will hold off until December or even wait until next year for another cut, amid stubbornly high inflation.
Ten- and 30-year gilt yields have still fallen 25bps and 30bps over the last month, respectively, to 4.4 and 5.2 per cent.
Thomas Pugh, chief economist at RSM UK, said financial markets ‘have gone from pricing in less than a 25 per cent chance of another rate cut by the end of the year to a two-thirds chance now, due to a lower inflation peak and rumours of a less-inflationary budget’.
Pugh thinks the BoE will keep base rate on hold at its current level of 4 per cent next, but said the door is open to a December cut – ‘especially if the budget is deflationary’.
He added: ‘The BoE has been on a pretty consistent once-a-quarter rate cutting path for the last eighteen months or so.
‘However, stubbornly strong wage growth, sticky inflation, the upcoming budget, and a clear shift by the MPC from worrying about the labour market to worrying about inflation meant it seemed likely to diverge from this path and keep rates on hold until at least February – until recently anyway.’
Analysts at ING predict the BoE will cut three more times this cycle, bringing base rate to 3.25 per cent assuming each move is 25bps lower.
They wrote in a note on Thursday: ‘Reeves faces a fiscal shortfall of roughly £25billion/year.
‘That’s likely to be made up through a combination of extending the freeze on tax thresholds, extending national insurance [payroll taxes] to landlords and partnerships, raising bank taxes, as well as tax on dividends/certain types of capital gains.
‘The Treasury is loath to do anything that might add to inflation, even if its scope to lower it is limited. All of that should mean gilt issuance falls next year in line with the Debt Management Office’s projections.’
DIY INVESTING PLATFORMS
AJ Bell
AJ Bell
Easy investing and ready-made portfolios
Hargreaves Lansdown
Hargreaves Lansdown
Free fund dealing and investment ideas
interactive investor
interactive investor
Flat-fee investing from £4.99 per month
InvestEngine
InvestEngine
Account and trading fee-free ETF investing
Trading 212
Trading 212
Free share dealing and no account fee
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.
