Pound falls further as borrowing costs rise again
2025-01-13
Category: economic

The pound has dropped to its lowest value against the dollar since November 2023 while government borrowing costs have continued to rise.The pound fell to $1.21 on Monday while the rate at which the government can borrow money hit its highest level since 2008 by one measure.Borrowing costs for many countries are rising across the world, though some have said decisions made in the Budget have made the UK particularly vulnerable.The prime minister said he had "full confidence" in Chancellor Rachel Reeves, but the Conservatives said Reeves was "hanging on by her fingernails".
Governments generally borrow money by selling bonds to big investors, such as pension funds. UK government bonds are known as gilts.The yield on the 10-year gilt - the interest rate at which the government pays back a decade-long loan to investors - has risen to 4.86%, its highest level for 17 years. The 30-year gilt rose to 5.42%, its highest level in 27 years.
Government debt costs in Germany, France, Spain and Italy also rose on Monday.Some experts say investors are reacting to the re-election of former US President Donald Trump and his talk of tariffs.There is concern this will lead to inflation being more persistent than previously thought, and therefore interest rates will not come down as quickly as expected, both in the US and elsewhere.Strong US jobs data released on Friday also added to expectations that US rates will stay higher for longer, and this has helped to strengthen the value of the dollar against other currencies.However, Emma Wall, head of platform investors at Hargreaves Lansdown, said the UK's problems were not purely caused by global issues, arguing that measures announced in the Budget have stoked inflation."If you can get inflation under control, you will see interest rates come down in the UK," she added.At the weekend, the chancellor defended her decision to travel to China to improve economic ties with the country at a time when gilt yields were rising.The Conservatives said she had "fled to China", but Reeves said agreements reached in Beijing would be worth £600m to the UK over the next five years.Reeves also faced questions over her self-imposed rules on government debt and spending, which she said on Saturday were "non-negotiable".Despite her commitment, some have questioned whether she will be able to achieve the targets without making further spending cuts or tax rises because of how government debt costs have risen.On Monday, Prime Minister Sir Keir Starmer said the government was going to keep to its fiscal rules.But he repeatedly refused to directly answer whether sticking to these rules would necessitate future spending cuts.Instead Sir Keir said the government would be "ruthless" in its decisions for the upcoming spending review.When asked if the chancellor would still be in post for the duration of the parliament, he said she had his "full confidence" and was "doing a fantastic job".Conservative leader Kemi Badenoch said: "The prime minister just refused to back his chancellor staying in her job."The markets are in turmoil and business confidence has crashed, yet the chancellor is nowhere to be seen."
Confidence 'bruised'
The government has made growing the UK's economy a key objective, but recent figures indicate the economy saw zero growth between July and September, while it contracted during October.Businesses have warned that Budget measures, such as the rise in employer National Insurance contributions, together with the higher National Living Wage could lead to job cuts and price rises.Rupert Soames, chair of the Confederation of British Business (CBI), said the picture was "not good" but insisted that firms and investors were still somewhat upbeat."I wouldn't say confidence is gone," he told the BBC's Today programme. "I'd say it's bruised."However, he said the government was making the situation worse by introducing the Employment Rights Bill, which he said contained "powerful dissuaders to employment".Unions argue the protections introduced in the bill, such as banning fire and rehire, make employees safer, while the government has said it "represents the biggest upgrade in employment rights for a generation".However, Mr Soames said the Bill would lead to job losses. "Businesses will not only not employ, they will let people go," he said.As part of its push for growth, the government revealed plans on Monday to make the UK the global capital of artificial intelligence through measures such as building a new supercomputer.Starmer said the technology has "vast potential" for rejuvenating UK public services, but the Conservatives called the plans "uninspiring" and criticised Labour's "economic mismanagement".