Borrowing costs shot up on both sides of the Atlantic yesterday as Donald Trump’s election cast further doubt about the path of interest rate cuts after the UK Budget.
The Bank of England, led by Andrew Bailey, and US Federal Reserve, chaired by Jerome Powell, are still expected to cut rates by a quarter of a percentage point today after falls in inflation in both Britain and America.
However, investors now fear Trump’s threats to impose heavy tariffs on imports to protect American jobs will spark a global trade war that pushes up prices.
And the president-elect’s plans for tax cuts, while welcomed by households and businesses, could also reignite inflation pressures in the US, while his policies, if fully enacted, could add £6trillion to America’s national debt pile.
His win came just a week after UK Chancellor Rachel Reeves laid out plans for £40billion of tax hikes and a borrowing binge to fund spending pledges.
Reduction: The Bank of England, led by Andrew Bailey (right), and US Federal Reserve, chaired by Jerome Powell (left), are still expected to cut rates by a quarter of a percentage point today
Yields on ten-year US government demand for gilts over the whole of 2023, as well as over five- and ten-year periods.
It came on a day of turmoil for global markets, as Wall Street shares hit record highs on Trump’s plans for tax cuts and deregulation.
But rallies elsewhere faded as traders digested the fallout that his policies may have on the wider economy.
Consultancy Capital Economics suggested bond market jitters could thwart Trump’s ambitions for deeper tax cuts to add to those implemented during his first administration.
‘The bond vigilantes are stirring and the risk of an even bigger adverse reaction could intimidate the Republicans into forsaking another big package of deficit-financed tax cuts,’ analysts said.
‘In that scenario, we would expect them to restrict themselves to extending the original Trump tax cuts, due to expire at end-2025.’
Kallum Pickering, chief economist at broker Peel Hunt, said: ‘So far, global markets have tolerated US fiscal largesse well. The risk is this no longer holds in case Trump triggers a serious bout of inflation in the US.’
He said the election result was ‘unlikely to influence the Federal Reserve’s likely decision to cut rates this week – or the likely cut in December either’, but added: ‘The tilt towards a potentially more inflationary policy mix may impede the Fed’s ability to stay the course with cuts in successive meetings through 2025.’
Jane Foley, senior foreign exchange strategist at Rabobank, said the Federal Reserve’s rate-cutting cycle ‘could be over early next year as policymakers react to the inflationary implications of tariffs’.
Justin Onuekwusi, chief investment officer at wealth manager St James’s Place, said the broader global bond market may feel ‘ripple effects’ if US bond yields rise.
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