Surge in borrowing costs will drive up mortgage interest rates, economists warn as Reeves heads to China amid turmoil
10 January 2025, 12:15 | Updated: 10 January 2025, 12:39
Rachel Reeves' surge in borrowing costs will lead to increased interest rates on mortgages and business loans, economists have warned.
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Government borrowing costs have hit a 27-year high, sparking concerns that the UK's economy is "flatlining".
It is now predicted to grow by only 0.9 per cent this year - less than half the two per cent predicted at the time of the Budget.
"We expect higher yields to act as an additional headwind to growth via household remortgaging and weaker investment, with the increase of the last few days worth around 0.1 percentage point of additional growth drag this year," James Moberly from Goldman Sachs said.
He added: "The rise in UK long-term yields in recent days is not driven by shifts in UK growth expectations or monetary policy, but primarily by concerns around the UK fiscal outlook."
The increase in borrowing costs will, in turn, influence interest rates, with mortgage borrowers expected to see increased interest rates, according to the investment bank.
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Deutsche Bank said "sluggish growth" was behind the surge in costs, combined with the UK's huge budget deficit - second only to the US out of all the G7 countries.
It comes as Ms Reeves has decided to press ahead with a trade trip to China, joined by a number of powerful UK financial officials, including the Governor of the Bank of England and the chief executive of the Financial Conduct Authority.
Investors are bracing for further increases on Friday, as the United States publishes crucial employment data.
However, Culture Secretary Lisa Nandy has sought to reassure Brits about turbulence in the markets, saying the Labour administration's tax and spend rules are "non-negotiable".
"It's obviously something we take very seriously, but these are global trends that have affected many countries, most notably the United States, as well as the UK," she said.
"We are still on track to be the fastest growing economy, according to the OECD in Europe."
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It's reported the Chancellor has asked ministers to draw up alternative plans for securing growth and "cease anti-growth measures" as she attempts to meet the Government's aim of improving living standards across the country.
Downing Street insisted it was "still the Chancellor's intention to have one big fiscal statement a year, not two" - as it swatted away suggestions of an emergency "mini-Budget" on March 26.
Reeves' trip to China makes her the most senior British official to visit Beijing in seven years - an attempt to re-engage with the world's second largest economy.
It comes as cross-bench peer Lord Jim O'Neill told LBC there needs to be a halt to the use of "emotive language" around the current borrowing figures.
"I think it needs to be put into some perspective about what's happening in the world as a whole," he told Ian Dale.
"The pound has not fallen since the budget, other than against the same strengthening dollar that has strengthened against everything else.
"The pound against the euro is the same today as it was on budget day... the pound has hardly moved against the Yen, so the commonality is that everything has weakened against the dollar.
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"People need to get this in perspective... I'd say 80 per cent of the move in bond yields has been because of the US. Since it became clear that Donald Trump was going to win...US bond yields have hit the highest level in nine months.
"And because of the role of the US bond market and the US financial markets in the world, it affects everything else around the world.
"The other 20 per cent is because the other markets are not sure both about the commitment by the government to this latest policy and some of the important details."
On Thursday, shadow chancellor Mel Stride criticised the Chancellor's decision to go ahead with the trip, questioning whether she will be forced to increase taxes further or cut public services should her fiscal headroom evaporate.
He said Ms Reeves should "now cancel her travel and focus on this country instead".
In the House of Commons, Reform UK deputy leader Richard Tice said Ms Reeves should "return from her ridiculous trip" given that the pound is "almost collapsing".
Tory former Treasury minister Dame Harriett Baldwin added: "Is the reason that the (Government) front bench is so empty today, the Chancellor has fled to China, that she has realised that her Budget means that she now is the arsonist?"
Any further spending cuts could be announced ahead of a spending review that has already required Government departments to find efficiency savings worth 5% of their budgets.
Treasury minister Darren Jones, who was sent by the Government to reply to an urgent question directed at the Chancellor, said the trip is "important" for UK trade and would continue.
The exchanges in the House of Commons came against the backdrop of Government borrowing costs continuing to surge, which has put more pressure on Labour over its fiscal plans.
Outside the chamber, Liberal Democrat leader Sir Ed Davey said Ms Reeves should cancel her trip to China and make an emergency statement to Parliament.
He said: "Instead of jetting off to China, the Chancellor should urgently come before the House of Commons to cancel her counterproductive jobs tax and set out a real plan for growth.
"The country is paying an ever-higher price for the total mess the Conservative Party made of our economy, and the Chancellor needs to realise that she'll never dig us out of this hole without a far more ambitious plan to grow our economy, including rebuilding trade with Europe."
Asked why the Chancellor did not respond to the urgent question, the Prime Minister's official spokesman said: "It's up to the Treasury who they send to respond to UQs.
"I think it's quite common for the chief secretary to respond to urgent questions in the chamber."
