Reeves Faces Loyalty Test After UK Market Release

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(Bloomberg) — Chancellor of the Exchequer Rachel Reeves has emerged unscathed from a series of high-profile tests this week in the UK. His next challenge will be proving to investors that he can put together his battered economic agenda.

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The chancellor arrived in Britain from China on Monday amid bond sales, a barrage of political criticism and the release of key data. The auctions proved expensive, but revealed the continued demand for UK debt. Meanwhile, Wednesday’s inflation reading came in lower than expected and eased the market trend that pushed borrowing costs for the UK’s benchmark mortgage to a 17-year high. Gilts then got another helping hand in assembling Treasuries in the US.

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For his part, Reeves was careful not to bring up the issue when he faced questions in the House of Commons, blaming global storms. And Prime Minister Keir Starmer lent his support on Wednesday, saying Reeves would remain chancellor for “many years to come.”

Events provided some relief for Reeves. He saw gold yields rise sharply in the weeks leading up to his October budget and again earlier this year, threatening the credibility of his plans for rapid growth and higher spending.

However, Reeves’ problems are not over. Yields were still high enough as of Wednesday afternoon to keep the finance minister from running afoul of his fiscal rules, according to Bloomberg Economics. He remains at the mercy of bond markets around the world between now and March 26 when the Office for Budget Responsibility, Britain’s financial institution, publishes an opinion that will determine whether the ruling Labor Party should charge higher taxes or cut spending.

Inflation data “has been a useful figure for him when he looks vulnerable,” said Steven Fielding, emeritus professor of political history at the University of Nottingham. But the next set of statistics can look very poor, and it will be for him again. Reeves and Starmer will face this pressure for a long time. “

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GDP data on Thursday could also reveal the extent of Britain’s struggle to achieve sustained fast growth, while gilts and the pound remain vulnerable to events abroad. The return of Donald Trump to the White House, and the prospect of a trade war and other inflationary policies, could move the UK regardless of the decisions of the Labor government.

“They’re going to have to realize that they’re not going to be as ambitious in their spending plans as they’ve been,” Mark Dowding, chief investment officer at RBC Bluebay Asset Management, told Bloomberg TV. Labor will not be able to “transform public services until they can get the economy going,” he added.

Economists and market players are increasingly skeptical that Labour’s fiscal plans are sustainable, with some saying they are relying on the OBR’s overly optimistic growth forecast. It is a difficult problem to fix as Reeves has promised not to bring back another budget increase after raising taxes by more than £40 billion ($49.2 billion) in October. He would like to tighten spending, people familiar with the matter told Bloomberg, but investors will need to be convinced that the left-leaning government can deliver any proposed cuts.

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The UK inflation print was a much-needed boon for Reeves and his Treasury colleagues. Consumer prices rose 2.5% from a year ago in December, down from 2.6% in November, the Office for National Statistics said.

Reeves did not mention the recent market sell-off in his response to the inflation data but said “there is still work to be done” to contain inflation.

What Bloomberg Economics Says…

“We still think the BOE will have the sense to lower interest rates gradually over the course of the year – both the economy and the labor market call for a less restrictive policy environment”

– Dan Hanson and Ana Andrade, economists. Click to read REACT in the terminal.

The slowdown in service sector price growth from 5% to 4.4%, the lowest since March 2022, provided “relief” to investors, according to Nomura economist George Buckley, even if it was due to lower air costs. and a significant reduction in hotel prices.

“We expect a reduction of 25 basis points per quarter to 3.5% early next year,” Buckley added. Traders have increased their cut bets, pricing in two cuts this year, as they started the day with less than a 50% chance of a second cut.

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Still, economists warned that inflation could rise above 3% in the coming months, partly due to higher energy and fuel costs. There is still a sense that Reeves is presiding over an economy in danger of “deflation,” the dreaded combination of high prices and anemic growth that goes a long way toward explaining why investors have so much money and pounds in their hair.

“What is important to our economy is that growth continues, but this has been killed by this government,” Chancellor Mel Stride said in a statement, referring to Labour’s £26 billion tax increase. “The chancellor must explain immediately how he will achieve this.”

—Courtesy of Andrew Atkinson.

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