As Andrew Bailey of the Bank of England noted yesterday when giving evidence in the House of Commons, interest rates are rising around the world right now, and not just in the UK.
The question is, why is that?
I recently suggested that this was in part because of the excessive valuations of stock markets, towards which money has been flowing, deflating government bond prices.
Now, let me offer another suggestion. This is that markets are signalling that they will not trust a US central bank that might be run for the personal and political benefit of one man. And, because they can see that is now on the cards, they are already demanding a higher risk premium to lend to the US government, businesses, and individuals. And, since US debt markets set the pace for the world, rates elsewhere are rising as well, as the UK is now seeing.
Let me unpack the consequences.
First, Trump's attack on the Fed is already having an effect. Bond markets look forward, not back. If they think the Fed might be compromised, they act now by pushing up the cost of borrowing on longer-term bonds. That is exactly what we are seeing.
Second, this means that the rise in global interest rates is not primarily driven by domestic economic conditions in the UK, or in Europe, or in Japan. Instead, it is being driven by political risk created by Trump in the United States. UK rates are up because of Trump, not because of anything Rachel Reeves or the Bank of England might have done.
Third, this has important implications. Those blaming UK interest rate rises on “reckless” government spending, or on supposed “bond vigilantes” punishing fiscal loosening, are simply wrong. The cost of money is being set by fears about American politics, not British fiscal policy.
Fourth, this matters for democracy. Trump wants to control interest rates not for the public good, but to extend his own bargaining power over corporations, banks, and even nations. That risk premium in global markets is a reflection of a simple truth: the more power Trump grabs, the more unstable the world becomes.
So what should we conclude?
- Interest rates in the UK are not, right now, a reflection of what our government is doing. They are a reflection of what Trump is doing.
- The argument that we must cut public spending or avoid investing in public services because of “market discipline” makes no sense. The so-called discipline is being imposed because of Trump's threat to financial stability, not because of anything in the UK economy.
- This makes it all the more absurd for Labour to box itself in with fiscal rules that depend on bond market reactions. When the markets are being driven by Trump's extortionate politics, those rules amount to nothing more than voluntary economic self-harm.
The lesson is obvious. The UK cannot allow its economic policy to be dictated by either the whims of the bond markets or the antics of Donald Trump. We need to reclaim the right to invest for the public good, to use the capacity of our own central bank, and to reject the false narrative that “there is no money.”
If we fail to do that, then Trump will not only succeed in destabilising the United States. He will succeed in destabilising us too — and only because we let him.
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Spot on. 🙂
I also agree with your previous comments that money going into the stock market bubble is also contributing to a rise in interest rates. A further reason why the government should ignore the cost/interest rate on bonds and govern by what the real economy needs.
Today, in his Substack blog, Robert Reich, writes along the same lines as you. He says, “And as longer-term rates rise, the stock market will fall (put on your seatbelts, folks)”. Now this is curious because the stock market would fall because investors can get better, long term, returns by selling stocks and swapping into bonds. In turn this would tend to prevent further rises in long term interest rates. For investors this seems like a sure thing. Not only are their investments safe, guaranteed by the government (though how good that guarantee is from a Trump administration I’m not so sure) but, if rates fall they stand to make capital gains.
But what’s with Robert Reich’s comment about putting on your seatbelts? I assume he means that high long term interest rates will trigger a reduction in stock prices and that, in turn, will trigger the collapse of stock market bubble.
In that case, US investors won’t pile more money into bonds (because that would push down the rate). Instead they will try to move their money completely out of the US. That would cause a fall in the value of the dollar and, consequently, a rise in US inflation.
In summary, Trump taking control of the US Fed could have very negative impacts on the US economy, with simultaneous reductions in bond prices, stock prices, the value of the dollar, and increases in inflation. This would affect the UK.
Interesting times.
Trump almost certainly (he can be inconsistent) still wants a low dollar and is no fan of the dollar’s reserve currency status (doesn’t mean he actually wants to end it though), the FED generally pursues strong dollar polices and loves “reserve currency status”, this is at the heart of Trump’s antagonism towards the fed.
Let’s work hard to promote a far more trustworthy global reserve currency.
The ties with US fiscal and monetary policy need to be loosened, if not totally cut.
Another sane, sensible synopsis that our media is INCAPABLE of putting over to the public and thus the whole charade plays on and our perceptions of the world shrinks further into the abyss of ‘can’t do anything about it’.
There is a good editorial in The Guardian today about the bond vigilante fallacy:
https://www.theguardian.com/commentisfree/2025/sep/03/the-guardian-view-on-fiscal-rules-and-financial-myths-britain-must-stop-fearing-imaginary-bond-vigilantes
That is the 2nd decent editorial piece from The Guardian recently. There was a good one a few days ago about central bank independence.
That is a surprise; I did not expect to see anything so deracinated from conventional, doctrinal neoliberal orthodoxy emanate from our conformist and generally flatulent Press.
The comparison with Japan is interesting. As the Guardian implies, and the facts show Japan does money its own way (and has done so for decades); and the Japanese people, generally appear to back the currency, back Japanese goods and back Japan, and not market raiders. I am not generalising. Britain’s debt is now 20% foreign owned. Japan, however has almost no foreign owned debt. In neither case is it an accident. The risks and consequences are obvious. Frankly, Britain has long held the values of the opportunistic pirate (we call it ‘free market enterprise’, but it doesn’t come free); and we pay the price of piracy; when it (and we) are inevitably found out. Japan marches on, with a debt/GDP ratio of around 250%+. Britain is paralysed, incapable of public investment (the private sector hasn’t invested in Britain in decades), because of a debt/GDP ratio of around 100%. The BoE trumpets its prime goal of monetary policy being inflation reduction, but has inflation of 3.8% (CPI). Japan inflation (core and headline i.e., with or without food inflation) are both 3.1%. The EU incidentally, has inflation (HCIP) of 2.4%. Japan’s trade deficit with the world is circa £48Bn (which seems around 1.5% of GDP, 2023 figures). The UK trade deficit is circa £233Bn (or around 9.2% of GDP, 2023 figures).
I could go on. Britain is an economic and monetary basket case; and the world is leaving us behind. Brexit was the final straw, for the economy, and with the Brexit Dublin III Regulations blunder it has destroyed our politics. All of it self-inflicted.
Much to agree with.
“Japan, with its own currency and a central bank working with the government, shows how the state shapes markets, not the other way round.”
I’m amazed the G published this…
We are liable to tie ourselves in knots trying to identify cause and effect in movements of interest rates, exchange rates, bond prices, and stock markets. Not to mention endogenous and exogenous variables affecting one or more of the above. But, we have to try.
Your analysis looks as good as any I’ve seen in recent weeks. P
Thanks
Not sure why rates are going up.
Chatted with a few old bond traders yesterday and all of us are buying bonds. Now, that might be as much to do with our age as anything else… we are all retired.
We also agreed that the UK does not have a debt problem – it might have an inflation problem… so some saw value in Index Linked gilts.
Why might inflation have stayed high? Well, Brexit, Corporate price gouging, hikes in government administered prices, Employers NI hike, high debt costs for companies (and others, no doubt) are all potential culprits. However, at these rates, gilts look a reasonable investment…. and no need to panic.
Agreed
Could the BOEs policy of excessive Quantitative Tightening be keeping interest rates high too?
That is the case, deliberately
I did think that once, the BoE has created what it thinks is enough slack in the economy by creating less consumption, more unemployment, more mortgage defaults, and fewer businesses we may see a drop in domestic inflation. Especially if this is combined with HMT inspired reductions in govt spending on welfare etc. Followed by BoE finally declaring victory over inflation and with its old interest rate weapon back to its 1990s state but the economy seriously damaged.
But if your right Richard and the main influences are Trump, foreign or global on interest rates and inflation then the economy is heading some sort of stagflation state?
Feels like 1970s/1980s territory.
Right now, that is becoming increasingly possible.