JP Morgan has issued a warning that º£½ÇÊÓƵ policy credibility is "coming under pressure" in the wake of ongoing disturbances in the gilt market and concerns over sluggish growth.
Gilt yields, which mirror the cost of government borrowing, have seen a significant rise in recent weeks, as reported by .
The yields on both 10-year and 30-year gilts have ascended for six straight days, resulting in the yield on the 10-year bond reaching a post-2008 peak, while the 30-year yield hit a post-1998 high.
These movements in gilt yields are largely in tandem with US Treasury yields, as market participants have reached the consensus that global interest rates must escalate to curb inflation.
However, JP Morgan analysts have pointed out that the market shifts in the º£½ÇÊÓƵ have been "exacerbated" by worries over an "expansionary fiscal policy" that could stoke inflation further. This comes after Chancellor Rachel Reeves' first Budget, which saw an increase in spending plans by approximately £70bn annually for the next five years.
"For now, the move has been orderly and there is no real case for the BoE to intervene on financial stability grounds as it did after the 2022 mini-Budget," wrote the JP Morgan analysts.
They also noted that the mix of rising borrowing costs and notably weaker recent growth will likely elevate the deficit trajectory and constrain flexibility within the government's fiscal rules.
There are indications that the Treasury is gearing up for "ruthless" public spending cuts to ensure adherence to these fiscal regulations.
The Prime Minister's spokesperson confirmed that "nothing (was) off the table when it comes to delivering value for money for taxpayers". Analysts from JP Morgan noted that while faster interest rate cuts could relieve some pressure on the government, most surveys indicate a significant rise in inflation expectations.
Additionally, the pound's weakness during the sell-off has led to higher import prices, and more rapid rate cuts could further devalue sterling, especially with the hawkish expectations for the Fed. They concluded, "The Bank of England has limited options," adding, "We expect the Bank will cut in February but find it hard to commit to a faster easing absent a clear recession taking place."
