The UK government’s borrowing costs have risen on global financial markets amid expectations that Rachel Reeves will change Britain’s debt rules to unlock up to £50bn of additional headroom for investment in infrastructure.
Ahead of next week’s budget, the Guardian revealed on Wednesday that the chancellor was preparing to confirm at the International Monetary Fund’s annual meetings in Washington that she would change the way the debt rule is calculated.
The yield – in effect the interest rate – on UK government bonds rose by about six points to trade above 4.2% in early trading on Thursday morning before easing, contrasting with a fall in borrowing costs for other comparable countries, including the US. The spread between gilts and German debt rose to the highest in more than a year, according to Bloomberg.
“It seems to be related to Reeves last night suggesting that the fiscal rules would be rewritten to increase spending on infrastructure,” Lyn Graham-Taylor, a senior rates strategist at Rabobank, told Reuters.
Reeves is not expected to specify the precise details of the change while in the US, but the Guardian has been told by a senior government source that she will target public sector net financial liabilities.
The measure – which is a broader definition of the government debt, including financial assets and liabilities – would have added £53bn to headroom within the fiscal rules if it had been applied at the last budget in March.
Reeves is expected to attend the IMF meetings on Thursday. Using the visit to Washington to announce the fiscal rule change will signal that Reeves is aligned with the traditionally conservative institution, which has gradually moved to support borrowing for investment in recent years.
Global bond yields have come under pressure in recent months amid expectations that cooling inflation will lead the world’s most powerful central banks to cut interest rates to avoid an economic hard landing.
Andrew Bailey, the Bank of England governor, suggested UK inflation was falling by more than expected, despite cautioning that there were still “outstanding questions” about whether price pressures would remain stubborn.
In comments appearing to hint that the Bank could further reduce borrowing costs at its next policy meeting in November, Bailey told a meeting at the IMF that there had been “good news” on inflation across advanced economies.
“Disinflation – and the UK is part of this – has actually taken place faster than we expected it to,” he said.
Earlier this month, Bailey told the Guardian that the Bank could become a “bit more aggressive” in cutting interest rates provided the news on inflation continued to be good. Financial markets expect a cut from 5% to 4.75% on 7 November.
Figures showed growth in the private sector economy slowed by more than anticipated in October, amid uncertainty over the impact of the budget on businesses and consumers.
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One closely monitored survey of business sentiment, the S&P Global Flash UK Composite Purchasing Managers Index, fell to an 11-month low of 51.7, down from 52.6 in September, on a scale where 50 marks the boundary between growth and contraction.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the budget has dampened business confidence and spending.
“Companies await clarity on government policy, with conflicts in the Middle East and Ukraine, as well as the US elections, adding to the nervousness about the economic outlook.”
Separately, the CBI’s latest health check on the sector showed sentiment across the UK manufacturing sector had fallen at the fastest pace in two years in the quarter to October.
The CBI’s Business Confidence Index has fallen to -24, down from -9 in July, showing that more companies were pessimistic rather than optimistic about their prospects.