Darren Jones: No need for emergency intervention
Harriett Baldwin MP accuses Rachel Reeves of having ‘fled to China’ rather than face MPs over the rise in public borrowing costs, because she realises her budget means she is “the arsonist”.
Baldwin says yesterday’s statement from the Treasury (which said the government has an iron grip on the public finances) was an “extraordinary emergency” effort to calm the markets.
Darren Jones says these “inflammatory” comments are rather surprising, and don’t reflect reality.
The trip to China has been in the diary for weeks, he points out.
And he rejects claims that the Treasury has intervened in the markets, saying yesterday’s statement was simply a response to questions from the media.
Jones says:
There has been no emergency statement or emergency intervention, these are make-believe words being propagated by members on the benches opposite….
There is no need for any emergency intervention, and there hasn’t been one.
[as reported earlier, the Daily Telegraph reported last night’s statement as the Treasury stepping in to halt market mayhem.
Technically, an intervention actually involves a government or central bank actually buying or selling an asset to move the markets, not simply issuing a press release].
Key events
Closing post.
Time to recap.
The turmoil in the UK bond market has calmed today, as the government insisted there was no need to intervene to stem rising borrowing costs.
After an early jump, UK bond yields have fallen back, and are only slightly above last night’s levels, meaning the country’s borrowing costs are little changed today/
The pound, which hit 14-month low in early trading, has recovered some ground – and is down two-thirds of a cent today at $1.23.
The recovery came after chief secretary to the Treasury, Darren Jones, told MPs that the government remained fully committed to its fiscal rules.
He said:
“In recent months, moves in financial markets have been largely driven by data and geopolitical events, which is to be expected as markets adjust to new information.
“UK gilt markets continue to function in an orderly way and underlying demand for the UK’s debt remains strong.”
Jones was answering an urgent question in the House of Commons, called after the UK’s 10-year borrowing costs hit the highest since 2008, while 30-year gilt yields climbed to a 26-year high.
Bank of England deputy governor Sarah Breeden also struck a calming tone tonight, telling an audience at the University of Edinburgh Business School that moves in the gilr market had been “orderly”.
Economists have suggested that the recent rise in borrowing costs has all-but-eaten away the headroom left by chancellor Rachel Reeves to hit her fiscal goals.
Some have suggested she could cut spending, or potentially raise some taxes, in the spring statement scheduled for March.
Richard Partington
The BoE’s Sarah Breeden has also said that direction of travel on UK interest rates is clear – downwards.
Bank rate will be coming down. The question is the pace at which it comes down. And we will only know that as the data evolves and we get a clearer read on the nature of the shocks that we are seeing.”
Richard Partington
My colleague Richard Partington has asked BoE deputy governor Sarah Breeden if the recent tightening of financial conditions strengthened the case for UK interest rate cuts.
She says:
“Of course we look at what’s happening to borrowing rates, look at them in the round, see what’s happening to demand in the economy, so the extent that interest rates have risen, and demand will be lower, we would expect to take that into account
“Let’s zoom out here. When i joined the MPC in November 2023 the 2 and 5 year rates at which people could borrow were more than 100bps higher than they are today [for fixed-rate mortgages].
So while we might have seen a tick-up recently, the big trend is downwards, that reflects the waves of adjustment of those external shocks, and we might expect that to feed into bank rate from here.”
The London stock market has closed higher tonight.
The FTSE 100 index of blue chip shares has ended the day up 0.8%, or 68 points, at 8319 points.
The smaller FTSE 250 index, which contains more UK companies, gained 0.3%, having hit a nine-month low this morning.
BoE’s Breeden: ‘so far so good’ in gilt markets
Richard Partington
Bank of England deputy governor Sarah Breeden has told her audience in Edinbugh that the central bank is watching the moves in the UK gilt market, and believes they have been “orderly”.
Breeden says:
Of course we’re monitoring what’s happening in the gilt market. It’s a core market, we care a lot about it.
A lot of the price moves reflect global factors happening in the US and Europe as well as here in the UK and that’s to be expected as markets react to news about what the outlook is for the fiscal position
We have a dashboard, we’re monitoring it, so far the moves have been orderly, we’ll continue to watch this space. So far so good.
Capital Economics, the City consultancy, are confident that UK government bonds will recover soon.
In a research note titled “A global bond market storm in a British teacup”, their senior markets economist Hubert de Barochez says:
UK Gilts have not only been embroiled in a global government bond sell-off, but they have fared worse than others. However, we think that bonds will recover before long, with yields in the UK falling particularly sharply by the end of this year.
BoE’s Breeden: economic activity appears to be weakening
Bank of England deputy governor Sarah Breeden has warned that activity in the UK economy appears to be slowing, which reinforces the case to cut interest rates.
In a speech to University of Edinburgh Business School this afternooon, Breeden says data is pointing to a slowing in economic activity in the UK, citing the small falls in GDP in September and October.
While the energy price shock has faded, the economy has also facing new shocks – including the changes to employers’ National Insurance Contributions (NICs) and the increase to the minimum wage that will be implemented in April, Breeden points out.
She says:
First, as monetary policymakers we must always be analysing which shocks we think are hitting the economy and what their implications might be for the medium-term inflation outlook. We have to remain flexible and constantly challenge ourselves about how wrong we could be and what that would mean. We must always be reading between the lines.
Second, I have updated my views on the shocks that have been driving the economy recently. The demand environment has been more resilient in recent years than we initially thought – partly because the response to the energy price shock was less negative than we thought, and probably also reflecting weaker supply. There is now some tentative evidence that activity is starting to weaken, though we expect it to pick up again.
Third, the recent evidence further supports the case to withdraw policy restrictiveness and I expect to continue to remove restrictiveness gradually over time. The important questions as I look ahead are what combination of shocks explains the recent slowdown in activity and how will employers respond to higher employment costs. The answers to those questions will affect the outlook for medium-term inflation and so the speed at which restrictiveness needs to be removed.
Market turmoil: the key charts
These charts paint a picture of the key moves we’ve seen in the UK bond market, the foreign exchange market, and equities in recent days:
What gilt sell-off might mean for you
It’s rarely good news when the UK bond market is headline news, so many Britons may be worried about the implications of the gilt market turmoil on their finances.
Financial services firm Hargreaves Lansdown has explained the impact on pensions and annuities.
Here’s Helen Morrissey, their head of pensions analysis:
“Falling bond prices could cause concern for retirees who are coming up to retirement invested in lifestyling arrangements. These move the member out of equities and into bonds the closer they get to retirement. However, there’s no need for knee-jerk reactions. Those who intend to remain invested through income drawdown have the ability to hold fire on drawing an income until the markets have recovered. Those who are looking to annuitise some or all of their pension pot will also likely find that the spike in gilt yields can push the income available from an annuity upwards, softening the impact. It’s also worth saying that you don’t have to annuitise all your pension at once. You can do it in stages throughout retirement securing a guaranteed income as your needs evolve while leaving the rest invested in drawdown where it can grow.”
And on mortgages, Sarah Coles, head of personal finance. at Hargreaves Lansdown, says:
“The rise in gilt yields always raises the spectre of rising fixed mortgage rates, because they’re very responsive to changes in interest rate expectations. Rates have already crept up very slightly, but there’s no need for prospective borrowers to panic at this stage.
It’s worth noting that although the bond markets have thrown a wobbly, it hasn’t particularly altered expectations of what the Bank of England is likely to do to rates. The market is still pricing in just over a 60% chance of a rate cut in February – it has moved from 66% to 64%, but that’s nothing to frighten the horses.
Very slightly higher rates have been brought in by some mortgage lenders, who had to secure a fixed rate in the swap markets while they’re more expensive, but as yet there’s nothing more widespread. This is likely to filter into more deals, but it’s not yet clear how long this disruption in the bond markets will last.
The bond market in the UK reacted dramatically to news out of the US – more so than other markets around the world. In the coming days, this could subside if the bond markets decide they’ve got a bit ahead of themselves. There are no guarantees, but the strength of the immediate reaction means there’s room for the markets to gain a bit of perspective. If that happens, we’ll see yields drop again, and mortgage rates could ease.
Of course, there are no guarantees. If more worrying news comes out of the US, or fears of stagflation spread, bond yields could remain higher, and if this happens, there’s more of a chance it will be reflected in more widespread higher mortgage rates.”
HSBC have issued an interesting research note, explaining how the financial markets are pricing in “persistently higher” UK inflation.
They explain:
A big part of the fiscal problem is a lack of growth. But the UK isn’t alone in Europe in. facing persistently weak productivity growth. Yet its high short and long-term interest rates are comparable to those of the faster-growing US.
Moreover, despite tighter expected monetary policy, market prices suggest that longer-term UK inflation might be a bit higher than in the eurozone. It feels like the worst of all worlds.
HSBC also flag that the Office for Budget Responsibility’s ‘ready reckoner’ is that a sustained 1% rise in long-term yields raises debt servicing costs by about £10bn a year.
So, if sustained, the rise in yields since the 30 October Budget could have wiped out the Chancellor’s £9.9bn of fiscal headroom. Unless something changes, more tough choices on tax rises, spending cuts or tearing up the new fiscal targets loom over the 26 March Spring Statement.
Full story: Reeves’ fiscal rules non-negotiable in face of bond sell-off, deputy tells MPs
Rachel Reeves will not break her promise to borrow money only for investment, even as gilt yields rose to their highest levels since the financial crisis, her deputy has said.
Darren Jones, the Treasury chief secretary, told MPs the chancellor would not borrow to pay for day-to-day spending despite rising UK borrowing costs that threaten to make it much harder for her to meet her fiscal rules.
He was answering an urgent question in the Commons about the recent market turmoil, which has sent UK borrowing costs higher, the pound lower and prompted calls for Reeves to cancel her long-planned trip to China.
Jones told the Commons:
“There should be no doubt about the government’s commitment to economic stability and sound public finances, this is why meeting the fiscal rules is non-negotiable.”
Rachel Reeves has three possible courses of action from here, should we move forward with elevated interest rates and sluggish private sector growth, Morgan Stanley analysts argue.
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The first, “obvious”, option, is simply to hike taxes to counter rising spending – perhaps as early as March.
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Another option, is to commit to steep spending cuts beyond the current Spending Review period, while also spending more in the near term.
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The third option is some financial wizardry, to make near-term cuts to capex budget plans, and re-route the funds into current budgets where needed.
It’s true that the first option, of tax increases, would increase revenues, but Reeves ruled out many potential tax rises before the election.
The second option has been used by chancellors in the past to keep within their long-term fiscal targets, but is tricky this time, as the upcoming spending review should run until almost the end of the five-year forecast horizon.
Although UK bond markets have stabilised, there are still risks afoot, warns Kathleen Brooks, research director at XTB.
She points out that although bond yields have stabilised at last night’s levels, they’re still at elevated levels.
Brooks suggests a quieter US bond market may be helping UK gilts:
The halt to the UK bond sell off could be down to multiple factors. Some have wondered about official intervention; however, we think that this is unlikely.
Financial markets are quiet on Thursday, US equity markets are closed, and the Treasury market has shortened hours due to President Carter’s funeral.
Since UK yields have been moving higher along with US yields, the fact that US bond markets are quiet could spill over to the UK. However, this could be a short reprieve.
Brooks suspects the UK bond market will suffer more frequent bouts of volatility this year, as it remains “firmly in the bond vigilante’s sights,” adding:
A weak economic outlook, nervous investors who will be sensitive to news headlines and data releases and also the failure of the current government to firmly lay out their plans to get public spending under control, get people back to work, and boost growth without taxing the UK economy further, are all weak links for the UK bond market.
Stellantis hits UK EV targets, despite Luton factory closure
Jasper Jolly
Vauxhall owner Stellantis has said that it has met the UK government’s electric car targets for 2024, despite blaming the rules for the planned closure of its van factory at Luton.
The carmaker on Thursday said that it sold 39,500 electric cars in 2024, up 59% compared with a year earlier. It said that “strong sales of the group’s extensive line-up of electric vehicles” meant it had complied with the UK’s zero-emission vehicle (ZEV) mandate for both cars and vans, without resorting to loopholes or buying “credits” from other manufacturers.
Under the mandate, carmakers must sell increasing numbers of electric vehicles every year. However, the industry has lobbied strenuously for the government to relax the targets, with changes expected by the spring.
Stellantis blamed the mandate for its decision to put 1,100 workers at the Luton factory at risk of redundancy, in one of the last decisions overseen by Carlos Tavares before he was ousted as chief executive. The Guardian previously revealed that Stellantis had told investors that it was confident of meeting the targets, but Stellantis argued on Thursday that tightening electric car targets would cause a problem in the coming years.
Eurig Druce, group managing director of Stellantis in the UK, said:
Despite offering a very comprehensive line-up of popular electric cars and vans, and a strong will and focus on making our EVs as attainable as possible, the steep trajectories of the ZEV mandate are out of step from current demand. Put simply, if the UK is to achieve its transport emission ambitions, and for EVs to represent 80% of new cars sold in 2030, then consumers are going to need more encouragement from government to do so.
Andy Palmer, the former boss of carmaker Aston Martin and now a consultant, said:
Against all odds, at least according to pockets of the media, Stellantis has proved that the ZEV mandate is achievable by hitting targets in 2024. This is even more impressive after the automaker has been reported, potentially incorrectly, as one of the firms most outspoken about reforming the policy.
Or perhaps all they are asking for is a little help to get more bums on EV seats. The ZEV mandate is boosting choice for consumers and driving down prices.
Matthew Amis, investment manager at investment manager abrdn, has predicted that Rachel Reeves will have to outline cuts to government spending in her spring statement scheduled for late March.
Amis says:
“Weakness in GBP [the pound] and the gilt market feels like an inevitable consequence of a badly received budget and the proposed stage management of 2025’s fiscal events. Jeremy Hunt started the trend of leaving very little fiscal headroom and Rachel Reeves continued that trend in October’s budget.
As gilt yields rose into year-end (admittedly mostly driven by news from the US), the limited fiscal headroom has been eroded. We expect that Reeves will have broken her own newly drafted fiscal rules when the OBR present their updated forecasts at the end of March.
The UK is borrowing a lot this year, investors need confidence to buy that debt otherwise gilt yields will continue to move higher and the currency will continue to weaken.
What might Reeves do? The spending review is not due to be delivered until June, that’s a long time for the market to speculate with confidence continuing to erode. We ultimately expect to see a Spring budget alongside the OBR forecasts, where she signals greater cuts to government spending.”
Mark Sweney
In the media world, Bauer Media, the owner of magazines and radio stations including Grazia, Heat, Kiss, Magic and Absolute, has acquired the UK and northern European business of billboard advertising giant Clear Channel for $625m (£507m).
New York-listed Clear Channel is selling its operations in 12 markets including the UK, where it operates more than 33,000 outdoor sites including billboards, posters and screens, including more than 2,000 in Greater London.
Bauer Media said that under the deal the European operation, which employs 1,400 staff, will continue to be led by existing Clear Channel management.
Clear Channel UK, which is headquartered in Golden Square in London, employs more than 700 people across 14 locations.
“Bringing together our two companies’ offerings will enable us to reach 350m consumers through 200 magazine brands, 150 audio brands and 110,000 out-of-home [advertising] sites across Europe,” said Yvonne Bauer, chair of the board of the German media giant.
“By enhancing our core media and related businesses while investing in our digital transformation, this move broadens our capabilities and strengthens our position as a major player in the highly competitive media industry.’’
The deal, which is expected to close later this year following regulatory approvals, will see Bauer take control of Clear Channel’s operations in the UK, Belgium, Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, the Netherlands, Norway, Poland and Sweden.
Bauer said that it already runs outdoor advertising operations in seven of the markets, and will become a new entrant in five.
Clear Channel has been seeking to sell its UK and northern European operations since 2023.
In November of that year the company announced the sale of its business in France to Equinox Industries, having previously sold its businesses in Switzerland, Italy.
In October, a deal to sell its business to a subsidiary of rival outdoor advertising company JC Decaux was terminated following a regulatory review.
The company has also conducted a strategic review of its business in Latin America, which includes operations in Mexico, Brazil, Chile and Peru.
Bauer Media’s lead adviser was LionTree while Moelis and Deutsche Bank held the remit to sell Clear Channel’s Europe-North operations.
Darren Jones pointed out to MPs today that the market for UK government debt is often influenced by a range of factors.
And it’s notable that today’s recovery in UK bond yields comes as US government debt also strengthens.
[yield rise when bond prices fall, and vice versa].
The yields on US Treasury bills have dropped today, in what will be a shortened session due to president Jimmy Carter’s funeral.
Government bonds often move in a sort of lock-step, as they react to the same sets of data covering – for example – inflation or growth, so it’s a worrying sign when just one country’s borrowing costs jump.
New programme for Ukraine commercial property reinsurance
Away from the drama in the government bond markets, McGill and Partners, a London based broker, has launched a programme to reinsure commercial properties in Ukraine against the risk of war damage.
The scheme is the first of its kind, my colleague Isaaq Tomkins reports.
They are collaborating with FortuneGuard, a Lloyd’s Lab insurance technology company, which will use AI to provide risk assessments for properties more than 100km from the front line.
Data on projectiles fired into the country will be used in order to provide businesses with a war-risk quote.
Since the outbreak of war, the international reinsurance market largely withdrew from providing war risk coverage in Ukraine. Now ARX, a local Ukrainian broker, will be able to underwrite policies up to $50m in value, with reinsurance provided by the London market and Lloyd’s syndicates. This is a hundred-fold increase on their previous policy limit of $500,000.
“We recognise the significant role of the insurance industry in supporting Ukraine’s economic regrowth.” said Steve McGill, CEO of McGill and Partners.
“By harnessing the power of AI and comprehensive data sets, we have been able to take a more informed approach to presenting and underwriting risk.”
Isabel Stockton, senior research economist at the IFS, says we shouldn’t be surprised if spending cuts, or tax rises, are needed to keep within the fiscal rules.
The problem, she points out, is that Rachel Reeves allowed herself very little headroom to keep within the rules back in October’s budget, so it doesn’t take much of a change to borrowing costs to put the debt trajectory off-course.
Stockton says:
“If recent rises in interest rates were to persist, they could easily erode most of razor-thin margin against the main fiscal rule. But the issue here is not so much that the past month has been especially eventful, but more that the margin was so small to begin with.
If continuing to meet the fiscal target requires new tax rises, or cuts to the already tight looking spending envelope for the subsequent spending review, then the Chancellor – and we – should not be surprised.”
