(qlmbusinessnews.com . Mon 13th Jan, 2025) London, UK —
Chancellor Reeves Faces Mounting Challenges Amid Rising Borrowing Costs and Falling Pound
Chancellor Rachel Reeves is under increasing pressure as UK government borrowing costs have climbed to their highest level in 16 years, while the pound has tumbled to a 14-month low against the dollar. Despite this, Reeves has embarked on a planned visit to China, accompanied by Bank of England Governor Andrew Bailey, drawing criticism for leaving during what opposition parties have termed “an economic crisis.”
The recent market turbulence has raised questions about the UK’s economic resilience. Government borrowing costs and sterling have both faced significant downward pressure, creating a challenging environment for Reeves as she strives to maintain fiscal discipline.
Budgetary Adjustments Likely
The Chancellor’s fiscal rules, which mandate reducing debt as a share of national income and avoiding borrowing for day-to-day spending, may require adjustments. Experts suggest that recent movements in the markets are already enough to disrupt Reeves’ Budget plans.
While global markets have largely been influenced by the inflationary concerns surrounding US President-elect Donald Trump’s policies, the UK has found itself uniquely disadvantaged, straddling the stagnant growth of the eurozone and inflationary pressures akin to those in the US.
Despite these challenges, the Treasury has reiterated that Reeves’ fiscal commitments remain “non-negotiable.” Analysts predict that any required adjustments could involve significant spending cuts or tax changes.
Mortgage Rates and Consumer Spending
For now, the rise in government borrowing costs has not translated into increased mortgage rates, providing a sliver of respite for homeowners. Fixed-term mortgage rates have remained stable, unlike the turmoil experienced during the 2022 mini-Budget crisis.
Meanwhile, the Bank of England is expected to proceed cautiously with interest rate reductions. Markets currently anticipate only one rate cut this year, leaving the base interest rate at 4.5%.
Retailers have shown unexpected resilience, with several reporting strong results. This has fuelled hope that consumer spending could drive modest economic growth in 2025.
Calls for a Renewed Growth Strategy
However, rising costs of servicing the national debt may force the government to consider further spending cuts, potentially amounting to £10bn. Reeves’ fiscal rules include provisions for suspension in cases of severe economic shocks, but invoking such measures would risk undermining credibility.
Critics argue that Labour’s focus on economic stability, while necessary post-Truss, lacks a coherent growth strategy. Borrowing for green investment, akin to the US “Bidenomics” model, could be a viable path, but with the new Trump administration steering away from such policies, questions remain about its feasibility.
As the UK navigates these economic headwinds, Reeves faces the daunting task of delivering a credible plan for growth without compromising stability.
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