Political and economic stability after the turmoil of the Tories’ last years in office was the great hope of financial markets when Labour was elected in July 2024.
It hasn’t been like that. A ruinous Keir Starmer-led Government has caused the yield on UK government bonds to remain the highest among the Group of Seven richest countries.
Two tax-raising budgets and a series of U-turns on tax and spend decisions have kept the bond vigilantes, who patrol the markets looking for weakness, on alert about UK prospects.
This, despite Britain’s debt-to- output ratio being superior to most of its competitors.
A 5-4 split decision by the Bank of England rate-setters to hold the official interest rate at 3.75 per cent, but edge towards further reductions in the spring, was drowned out by the most serious political drama of Starmer’s botched 18 months in office.
Bank Governor Andrew Bailey felt strongly enough to move out of his comfort zone and declare his shock at the Mandelson affair amid fears of a ‘cover-up’.
‘Cover-up’: Bank of England Governor Andrew Bailey (pictured) said he was ‘shocked’ by revelations about Peter Mandelson’s relationship with the paedophile financier Jeffery Epstein
The terrible lapse of judgment and incompetent vetting of Peter Mandelson, as ambassador to the United States, is an existential issue for a Prime Minister who we thought took pride in the rule of law.
Before the interest rate vote, the yield on the ten-year gilt climbed above 4.6 per cent, the highest level since November.
In recent weeks sterling has been a beneficiary of the dollar’s weakness because of an array of unpredictable policies in Washington.
The tension over US central bank independence has been relieved by the nomination of former Federal Reserve governor and Stanford economic thinker Kevin Warsh to become the next chair of the Federal Reserve.
But trauma on Downing Street saw the pound slip back towards $1.35 against the dollar yesterday.
The calm in markets since the Budget and the improvement in the public finances will be undermined if gilt yields creep higher than forecast and the interest bill destroys Chancellor Rachel Reeves’ budgetary flexibility.
The Bank vote to hold rates focused mainly on inflation prospects, and particularly the labour market. Hawks on the Monetary Policy Committee, led by Bank chief economist Huw Pill, acutely are aware of the risks of a wage price spiral.
A long period of excessive headline inflation – it was well above target at 3.4 per cent in December – has embedded household expectations of higher prices for food and energy.
The generosity of public pay settlements and the forward indicators on wages suggest that negotiators are not yet ready to acknowledge that disinflation is here to stay.
The Bank says that by April, as a result of steps taken in the Budget, the consumer price index will fall back to 2 per cent.
Given this projection it is more the pity that the Bank remains so cautious.
The UK is in the foothills of an upturn. Nevertheless the Old Lady’s forecasters are gloomy. The growth forecast for 2026 has been lowered from 1.2 per cent to 0.9 per cent.
That is way below last year’s projection of 1.4 per cent from the Bank and a similar forecast from the Office for Budget Responsibility.
Jobs are suffering because of the Government’s poorly designed tax on jobs, the higher minimum wage and expensive employment reforms.
Despite these hammer blows, 2026 is off to a reasonable start with forward-looking data from the manufacturing, services and lagging construction sector all pointing upwards.
The Bank should have backed recovery by cutting by at least a quarter-point, giving growth a chance.
Lowering rates would have given first-time buyers a better chance to climb the housing ladder and been an incentive for households to consume and businesses to invest.
Jeffrey Epstein’s web of corruption and Mandelson’s alleged role have cast a terrible shadow over this Government.
The greatest risk to confidence and recovery would be vanishing political stability and more uncertainty.
We saw the severe damage that did ahead of the Budget. A reduction in rates would have provided much-needed healing to an endangered economy.
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