UK’s Reeves struggles to find ways out of market slump

LONDON: Britain’s finance minister Rachel Reeves and Prime Minister Keir Starmer are seeking to stem a market slump, but for now what happens next to rising government borrowing costs and the falling pound is largely beyond their control.

Donald Trump and US economic data are likely to have a bigger influence on whether this month’s UK selloff proves to be a blip or the start of a crisis for Starmer’s government, elected last July.

Reeves, visiting China at the weekend, said her targets for fixing the public finances -- which have been hit by the rise in borrowing costs -- were non-negotiable and “we will take actions to ensure that we meet those fiscal rules”.

Early on Monday, 30-year gilt yields hit a new post-1998 high and sterling fell to its lowest since November 2023.Asked about the market situation, Starmer told reporters his team would be “ruthless” about repairing the budget.

The government has blamed previous Conservative governments for damaging the economy and public finances after the shocks of Brexit and the mini-budget crisis under former Prime Minister Liz Truss in 2022.

But Reeves has limited options to change the tone in markets.If Britain’s budget forecasters say on March 26 that Reeves is off-course to meet her fiscal rules, she could announce future spending cuts to get them back on track.

She already plans a lot of spending restraint, however, and the prospect of more pain would anger many of the governing centre-left Labour Party’s members and voters.The option of more tax hikes seems to be off the table with firms cutting hiring after Reeves hit them with higher social security contributions in her October budget.

“It’s a tough balancing act with no easy solutions,” Hetal Mehta, head of economic research at St James’s Place, said.Reeves is due to make an economic growth speech in the coming weeks before setting out a detailed plan in a two-year Spending Review expected in June.

Measures announced so far for speeding up the economy are only expected to have a meaningful impact in the 2030s.

TRUMP TAKES OVER

Reeves’ next full budget is due in October or November, by which time the global economic picture could be very different.

US President-elect Trump’s promise to impose additional tariffs on imports is widely expected to push up US inflation and investors are pricing in only one interest rate cut by the US Federal Reserve in 2025.

With British gilts often moving in line with US Treasuries, the chance of yields falling sharply look slim if Trump goes through with his tariff plan.Then there is Britain’s reliance on what former Bank of England Governor Mark Carney called “the kindness of strangers” to offset its large current account deficit, the second-biggest in the Group of Seven after the United States.