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The recent surge in UK borrowing costs has sparked widespread attention; however, economists have stressed that it is not akin to the market instability caused by the infamous “mini-budget” in late 2022. During last year’s upheaval, the controversial budget proposed by then-Prime Minister Liz Truss, coined “Trussonomics”, led to a sharp increase in gilt yields as investors reacted to the unfunded tax cuts. Currently, the rise in UK borrowing costs is being driven by more conventional market forces, such as inflationary pressures and central bank actions, rather than a loss of confidence in government fiscal policy.
The turmoil in the fall of 2022, following the unexpected fiscal plan, saw UK bond yields skyrocket, leading investors to make swift adjustments in their portfolios. With markets reacting adversely, there was a sharp drop in the value of the pound and a temporary freeze in the UK housing sector due to spiking mortgage rates. This chaos caused significant financial instability, forcing the Bank of England to step in and make emergency bond purchases to prevent further damage to pension funds and liquidity in the financial system. Analysts note that this current environment, though tense, lacks the same level of abruptness and shock that led to market disorder last autumn.
Today, the primary culprit behind rising borrowing rates is inflation, which remains stubbornly high, prompting the Bank of England (BoE) to hike its key interest rates to control price growth. These inflationary pressures are also placing upward pressure on gilt yields, as investors demand higher compensation for holding government debt amidst rising price levels. The difference now, analysts argue, is that market participants are prepared, with rate hikes largely anticipated and factored into most investment and borrowing decisions. Furthermore, the BoE’s prior rate hikes, along with fiscal prudence from the current administration, have helped maintain a level of confidence that was absent during the mini-budget period.
Economists argue that the comparison with the “Trussonomics” crisis is misguided for several reasons. The past spike in borrowing costs was tumultuous, driven by a lack of faith in the UK’s fiscal trajectory under untested policies. However, the current environment demonstrates a more measured reaction by institutional investors who are managing inflationary risks, but without panic. While elevated gilt yields could potentially dampen economic growth and put pressure on the housing market once again, the system appears better equipped to handle these challenges now than it was during the height of last year’s turmoil. The focus remains on inflation control, rather than crisis management, and so far, market dynamics indicate that while borrowing costs are rising, the overall financial stability of the UK remains intact.
