Many Happy Returns Soaring Gilt Yields and Strained Public Finances, with Simon French
Jan 15, 2025
Simon French, Chief Economist at Panmure Liberum and writer for The Times, dives into the surge of gilt yields and its impact on UK government finances. He discusses the potential for tax increases or spending cuts while questioning if this issue is unique to the UK. The conversation also explores the Bank of England's challenges, the undervaluation of UK stocks post-Brexit, and the essential role of stable fiscal rules for long-term economic health. In a light-hearted segment, they ponder the necessity of government fiscal rules.
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UK Bond Yields and Global Factors
- The UK's long-end yield curve is influenced by global growth and inflation expectations.
- The UK is also exposed to global interest rate changes, making it a "price taker" for its cost of money.
Bank of England's Quantitative Tightening
- The Bank of England's quantitative tightening (QT) involves selling bonds, potentially increasing yields.
- This contrasts with other central banks and is partly due to the longer duration of UK gilts.
Impact of Gilt Yields on Government Finances
- Rising gilt yields reduce the government's fiscal headroom, increasing the likelihood of tax rises or spending cuts.
- Independent economists suggest the recent yield surge has likely eliminated the existing headroom.