As the Guardian noted last night:
The UK government's long-term borrowing costs have reached the highest level since 1998 amid investor concerns over Britain's sluggish growth prospects and stubbornly high inflation.
The yield – in effect the interest rate – on UK 30-year government debt rose by as much as four basis points to 5.22% on Tuesday, above the peak reached after Liz Truss's mini-budget in 2022 caused turmoil in financial markets, to hit the highest level in 27 years.
This move was not predicted by the Bank of England.
I did not expect it.
But then, I did not really expect Trump's election, however bad the Democrat campaign was.
I also did not expect that Trump would try to impose his madness on the world, that tariffs would occur, that a trade war would commence, or that he would seek to actively engage in the affairs of many other nations. It seems likely that all of those things are going to happen now. We are in another place.
But that does not explain why UK interest rates are so high. There is another explanation for that, and it is all down to the Bank of England policy.
Remember that this year, the UK is expected to run a deficit of around £140 billion. That is what, in net terms, it supposedly has to fund, presuming that the government will not borrow directly from the Bank of England, which it could.
But that is not all that is influencing the UYK government interest rate. The Bank of England's quantitative tightening policy is also progressing at a rapid pace, selling vast quantities of UK government bonds back into financial markets for no financial gain for the people of the UK. In fact, the process is realising considerable losses for the UK government, wholly unnecessarily, but that is not putting a halt to it. Dogma comes before any such concerns at the Bank of England.
The latest data we have on these sales comes from the Bank of England itself and is for the quarter to September 2024:
In three months, the Bank of England sold £36 billion of government bonds. The aim was to drain money from the private sector economy to constrain growth. Simultaneously, the aim was to support high interest rates, which the Bank thinks necessary to control inflation. As a result, we experienced no growth and did get high interest rates. The policy was, in its own terms, very successful. It caused all the harm that it was designed to deliver.
And now, look at the reactions, which flow something like this:
"Panic, interest rates are rising."
"Panic, that means government costs will increase. How will it balance its books?"
"Panic, there is no growth. Tax revenues will fall. How will the government balance its books?"
"The government must cut its spending, even if that cuts growth and makes revenues worse, and may push interest rates higher as a result."
"Panic, the government must increase taxes as it cannot find spending to cut further."
"Panic, that means interest rates must remain high as the government is going to borrow more."
"Panic....this process will repeat, time after time, after time."
Of course, the process will not repeat, but under Rachel Reeves, it will.
This cycle could be broken in four ways.
First, the Bank of England could be told to stop quantitative tightening. The massive harm that policy is causing would come to an end. In particular, it is likely that interest rates would fall quickly.
Second, the government could say it will, if need be, use quantitative easing to fund its investment programmes for the time being, taking all the pressure off markets to provide funding in a way that would guarantee growth whilst reducing costs. Alternatively, it could just borrow from the Bank of England for a few months whilst markets stabilise. When the country is under threat of a coup from an external power, that would be a quite fair thing to do
Third, the government could borrow from the public at a cost much less than 5 per cent. National Savings and Investments could deliver much more than it does at around four per cent. Most of its products are paying at around 3.5% at present. It makes sense to do this, and why shouldn't savers benefit?
Fourth, the government does not need to balance its books. That constraint is solely of Rachel Reeves' own creation, and when times change, so should she.
There is no reason to panic, in other words. Options are available. Our problem is that the people in charge of our economy do not want to use them.
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It is a double edged sword, all of the issues you raise and the solutions you offer could work. However, because the interest rates/yield has risen there is a very major upside to the Whole of Government Accounts for 2024/25. And that upside is that, in practice, our total debts will fall. How much by, we’ll have to wait and see.
Given
a) Reeves is a wholly owned creation of the BoE and the Uk banking sector
b) the BoE and the Uk banking sector is wholly insulated from the political consequences of what the do (or do not do)
c) the aim of high interest rates is to keep the banking sector well off
This begs the question: why is the mainstream media not focusing its fire power on banksters in general and the BoE in particular. Why no attacks on individual members of the BoE?.
& finally: why are the options outlined not under consideration by Reeves & co (now go back to point “a”).
You start QE now and Sterling goes through the floor.
You don’t know that
And I disagree
Slowing/stopping QT is not QE; that would be a start.
Sterling might weaken – but would that be a disaster? Don’t get fixated on the GBPUSD rate – the USD is boosted by huge deficits and expectations of tariffs that are driving inflation expectations. Against the EUR, GBP is at post COVID highs; same with the JPY. Even CNY (China) is weakening against the mighty dollar.
Before anyone, for a moment, thinks that because 30 year UK government bond rates are now up at the levels seen after the Truss/Kwarteng mini-budget of September 2022 that Starmer is “as bad as Truss”, think again. US Treasury 30 year yields then were 3.5%; today they are almost 5%. Against that international backdrop it’s not surprising that UK rates are where they are. (US rates are up because of Trump and a persistently strong economy due to huge deficit spending).
For sure, QT is, at the margin, pushing yields up but the real culprit (along with the international environment) is the reluctance of the BoE to cut the base rate.
This vicious circle of lower tax revenues, more cuts needs to be broken and the direction of argument reversed.
“We can only have the health/education/transport/housing we can afford” must become “we can only have a productive economy if we have healthy, well educated workers that can get to work and have somewhere decent to rest at the end of the day”.
That change of direction is nowhere in sight at the moent.
Agreed
The UK was not the only country to engage in QE, nor to be engaging in QT currently. A useful comparison is with the US. It has been doing around $50bn/month of QT, or a little over 3x the rate the UK has.
However, its GDP is over 8x the size of the UK GDP and its National Debt over 11x the size of UK National Debt. Relative to the US the UK is therefore engaging in about 2.5x to 4x the scale of QT that the US is. N.B. It is also stated that the US is doing QT basically by letting things expire rather than actively buying back, and you might assume that the BoE is instead actively buying back as well.
The Bank of England says that it uses QE to lower costs when Bank of England rates are already low, but states QT isn’t used to impact Interest Rates or Inflation but instead to allow it to engage in QE in the future if required. There is a deliberate omission of the impact of QT on rates and inflation which is dishonest.
Since the buy-back seems to be anomalous compared to comparable countries, there should be a full justification of why the BoE thinks it should be taking a different path on QT and what the impact of this is. I’m pretty sure that at the moment there would be many who are not happy at increased financial pressure caused specifically by BoE intervention.
The BoE policy is out of line. You are right, the US is letting binds expire. The UK is actively selling them, at a loss. You could niot make up a policy as bizarre as this up.
Furthermore, the US economy is doing far better then the UK (yes, we know that GDP is a poor measure etc.. but it’s the one policymakers and traders focus on (for now)) so QT for them is not such an egregious error – indeed, possibly not an error at all at their modest pace.
Agreed – letting them expire is going to be pretty neutral, but buying them back at a point where prices are unfavourable means creating a loss, and a net transfer of wealth from public coffers to the sellers. Where’s the justification for having an anomalous policy that crystallises losses for the public while inflicting economic pain on the population?
All these points are well conceived and made: so why has nobody in British banking*, financial sector*, politics, economics or journalism noticed?
* tongue in cheek there, perhaps.
But what we will get instead will be:
(Badenoch): Labour have let borrowing get out of control by surrendering to the unions’ public sector pay demands. We need a public inquiry
(Fa***e): Immigration is draining the wealth out of our Great Country. We need Trump, Bezos, Zuckerberg and Musk to rescue us from our government and unite us with Greenland, Canada, & the Panama Canal, in a great trans-oceanic federation.
(Andrew Tate): “Britan (sic) needs more real men. Make me your Prime Man.”
(Reeves): “We so want to make everything better, we really really do, but we have to live within our means, until growth is achieved. This will require difficult decisions.”
(Starmer): “People of Britain, we will fight inflation on the low water mark of our foreshores, it will take haemmorhage, lachrymation, and perspiration, but we will never give up. I am today announcing Seven Sincerities to guide our journey to prosperity as we stand together on the precipice of fiscal responsibility.”
More seriously, we do need to anticipate the rubbish responses of our opponents, so that we are ready to demolish their arguments in advance.
Keep up the good work. The good side effect of all this nonsense, is that your economic heterodoxy gets a look-in. I mean, it can’t be worse than the drivel on offer from the others, can it?
Thanks for this post Richard.
Isn’t it amazing how our ‘independent’ news corporation the BBC cannot seem to outline these different options for available government money in their articles.
It would seem they only believe that government money is available through QT and tax payers intake.
Yes, Newsnight on BBC 2 TV this (Wednesday) evening had a piece on this, with three politicians (admittedly Tim Farron, I think it was, managed to get in the necessity of government investing in infrastructure) and the usual narrow analysis from two correspondents: alternative narratives and options not on the table.
My sense is we live in a system where each individual, each business, organisation etc. is compelled to protect its own income, which leads in many ways to practices that are harmful. We see it in food, privatised utilities, pharma, planned obsolescence, in marketing that hypes mediocrity, client journalism, corrupted govts, untrustworthy research… and then it becomes vast when it concerns the banking sector, its effects much more pronounced but the same thing. It reminds me of two sayings: it’s impossible for someone to understand something when their income depends upon them not understanding it, and it’s easier to con someone than to convince them they’ve been conned.
Many people may believe that the system we live in is basically ok but needs a few tweaks to deal with a handful of bad faith actors. But it is a systemic problem – it is too much to ask someone to jeopardize their livelihood, upon which everything hangs, to do the right thing (people spend a lifetime in hated work to pays the bills, and, as noted in a previous blog, will work in sectors producing nothing of value for others – income by any means to survive). So, people convince themselves (because they need to) that there is good in what they do, and trying to shift that is very difficult and, even if that shift occurs, people may, to survive, keep doing it anyway. Only a system that allows people to say no and supports that decision without detriment will enable people to act in sufficient numbers (occasional whistleblowers signal that many more will be staying quiet). What we’ve created is an economic straightjacket for many (I’m including myself here, though, thankfully, somehow, I’ve managed to find work that does contribute positively) that pretty much forces people into work that undermines their own and their families’ best interests, simply to survive. I’ve said it before, I keep returning here because there is hope offered, illuminating the problems, offering alternatives, when so little media does that.
Thanks
“What we’ve created is an economic straightjacket for many (I’m including myself here, though, thankfully, somehow, I’ve managed to find work that does contribute positively) that pretty much forces people into work that undermines their own and their families’ best interests, simply to survive.”
It seems to me that the overall strategy is pretty clear:
If the 1% can force the 99% into ‘debt’ of one kind or another that can never be repaid – rent, privatised utilities, travel, heathcare – they will have effectively enslaved the whole population and generations to come. If nobody has the freedom to walk away, nobody has the freedom to disobey or even disagree, or to re-configure society. This I tink is partly why the culture war against Boomers. We are the last generation that can remember that things could be different. And TBH too many of us are happy to simply reap the fruits of that for ourselves.
The term ‘wage slave’ is not an unreasonable one to consider, nor ‘precariat’.
There have been suggestions that things like Universal Basic Income would make people lazy, but the evidence of studies elsewhere show that as well as improving mental health, it facilitates people starting their own businesses.
At the moment many are stuck with cost of living pressures worsened by higher interest rates, and feel unable to take risks changing jobs, let alone switching to building their own business. This does benefit those business leaders who choose to take advantage of such insecurity.
Borrowing costs make that worse, because it makes it harder to build or grow a business. Meanwhile, if you’re lucky enough (like I was recently) to have non-public share options available, then unless you’re already wealthy borrowing money to exercise these is a higher cost and risk, too. This means the rewards already offered to professionals will be realised by fewer, further concentrating wealth.
The Bank of England’s aim is to funnel money to the well-off, because everyone is convinced that the trickle-down of wealth is what drives the economy.
It doesn’t, and that is evidenced by the last 40 years, having generated unprecedented wealth inequality, and austerity that has killed hundreds of thousands.
I would suggest that trickle-down happens, but it’s just that, a trickle. If you put the same amount of money directly to the worst off then they have essentials and near-essentials that they would immediately spend on, creating a much bigger effect. Bubble-up economics always likely to be far more effective, at least until those supported have ‘enough’, and we’re nowhere near that.
I’ve known some business owners who have lived a whole life of privilege who I think in some cases do believe in trickle-down economics. They think that their largesse makes things OK for others around. To a limited extend it can raise those around. But not as much as a fairer tax system which doesn’t try to use luxury goods as an inefficient intermediary to supporting those who actually need it.
I disagree
Wealth floods up
The board of the bank of England needs to be replaced they are beyond useless they are actually harmful to the well being of this country.
It makes my blood boil what on earth are Starmer and Reeves (and 400 Labour MPs) doing sitting on their hands during all this madness.
Farage could not hope for more utter incompetence, poltical cowardice and outright stupidity.
I think that the high interest rates are all part and parcel of the relationship with austerity measures – it might be that the rich are in a panic grabbing as much as they can or it is a deliberate ploy to create further hardship and more division ripe for exploitation.
But you have to really ask, do any of them really know what they are doing? They are playing with fire for sure.
Meanwhile in the High Street Banking world, a small saver looking for instant access savings will receive around 1.5% (and if they also have a current account, they will be quite likely be paying more in fees than their savings account pays in interest).
And to think they were bailed out in the crash to look after everyone so well. Rejoice. Be grateful.
If Labour voters become disappointed in the actions of this Labour Government, they can safely be ignored for the next four years. In contrast, if the Financial Markets dislike what the Government is doing, they can force a change of direction within days or weeks. What I find striking is that, while disillusionment with Labour has soared, the stock market and currency markets have remained steady. If Labour was doing its job in reducing inequality, I would expect the markets to be on a knife edge, constantly jittering if the Government seemed to want to do too much. When the markets are steady, it may be an ongoing indicator that the Government is expected to do little or nothing to help those who voted for them. I note that CPIH (the measure that take some account of housing costs) is currently 3.5%. The public sector pay offer is 2.8%, a real-terms cut of 0.7%. Richard’s 5.22% bond offer is 1.72% above inflation for those who have money. So much for reducing inequality.
Absolutely. We HAVE to stop QT. We obviously can’t afford to keep on turning fake debt into real debt: https://gezwinstanley.wordpress.com/2024/10/28/infrequently-asked-questions-about-quantitative-tightening-that-you-were-never-even-meant-to-ask/
Richard. What do you think of Jonathan Portes article published in today’s Guardian?
Labour apology by a former Labour adviser pretending that Reeves cannot reduce the rate of her own volition, which she can by taking control of the BoE.
I have the honour (privilege?!?) of being invited to a BoE event, in about a month from now, where they want to have discussions with ‘the public’ around what our concerns are regarding the economy, cost of living etc; and I think they want to explain the BoE’s role and answer questions.
I shall try to weave some of the themes from here into that! Maybe they’ll be surprised if I can show some understanding of QE/QT, bonds, government ‘debt’ and interest rates? Thanks mainly to this blog, I think I do…
I’ll report back if I can; and also comment on the refreshments they say will be offered! 😉
They even pay a small fee/travel allowance. I’ll use my bus pass.
Thanks
Good luck
The ‘markets’ predict, not set interest rates. Banks will buy government bonds if it makes them more money than reserves:
https://new-wayland.com/blog/mmt-verify-will-investors-shun-government-debt/
“Buying government debt is the only alternative for the financial system to holding reserve deposits.
The Bank of England pays interest on reserves at the Bank Rate. Banks forecast how the Bank Rate will fluctuate over time and how much money they will make. They will buy UK government debt if they believe it will make them more money.
Therefore, simple competition between the two alternatives determines the price of UK government debt.
If the Bank dropped interest rates to zero, stating it would stay there permanently, then the price of UK government debt would rapidly follow. We can see this in Japan where interest rates are near zero and the rates on Japanese Government Bonds remain very low. ”
Also the government should just set interest rates at zero:
https://new-wayland.com/blog/interest-price-spiral/
“The Myth
The standard line is this from the Bank of England
when we raise Bank Rate, banks will usually increase how much they charge on loans and the interest they offer on savings. This tends to discourage businesses from taking out loans to finance investment, and to encourage people to save rather than spend.”
“Overall if loans go down, financial savings must go down by exactly the same amount.
If you want the stock of bank loans to come down, while the stock of bank deposits goes up, then, unfortunately, reality won’t let you do that.”
“As MMT shows the cost of credit is incorporated into the cost of all goods and services. The higher the interest rate, the higher the price.
The Myth recommends pouring fuel on the fire. MMT recommends a permanently zero Bank Rate, and making central bankers, along with their expensive entourage, redundant.”
As I have explained often, reducing the rate paid on central bank reserve accounts makes total sense. Tiering the rate makes even more sense. We have to presume Reeves wants high rates.
[…] However, what, without exception, they fail to note is that the Bank of England is creating much, if not most, of this turmoil in this country as a consequence of its aggressive policy of quantitative tightening, to which I referred yesterday on this blog. […]