Rachel Reeves, the Chancellor, has promised to take “difficult decisions” in her upcoming Budget to limit ever-increasing debts. However, Ms Reeves has also indicated she may change the fiscal rules to open up more space to borrow to invest.
Downing Street on Tuesday dismissed suggestions that changes to the fiscal rules could trigger a bond market meltdown similar to the one seen after the mini-Budget in 2022.
The Prime Minister’s official spokesman said: “Obviously, I wouldn’t accept that characterisation.
“The Government has made clear that one of the first steps of this Government is to restore economic stability in the Budget. It will absolutely deliver on that, delivering on the robust fiscal rules that were set out in the manifesto.
“That includes moving the current Budget into balance, it includes debt falling as a share of the economy, and more broadly, as I say, the Budget will be about fixing the foundations of the economy, delivering stability, because it is only with economic stability that we will get the growth and investment that the economy needs.”
Bond markets are also sensitive to interest rates and the sharp rise in yields in recent weeks has been fuelled by expectations that the European Central Bank (ECB) will have to slash interest rates more quickly than the Bank of England, analysts at JP Morgan said.
Francis Diamond at the investment bank said: “The Bank of England continues to sound relatively patient and cautious on the pace of monetary policy easing.”
Andrew Bailey, the Bank of England’s Governor, last week raised the prospect that policymakers could become “more aggressive” on rate cuts.
However, his chief economist Huw Pill cautioned just a day later: “It will be important to guard against the risk of cutting rates either too far or too fast”.