The Bank of England’s interest-rate cuts have failed to translate into lower borrowing costs for households and the government, leaving Chancellor Rachel Reeves struggling to achieve her economic growth targets. The central bank has lowered its benchmark rate three times since August, but swap rates and gilt yields remain high, making it harder for BOE Governor Andrew Bailey to loosen financial conditions.
The UK’s five-year sterling swap rate is now 16 basis points higher than when the BOE first cut rates in August, while the five-year gilt yield has increased by more than during any previous loosening since the bank became independent. Borrowing rates on personal loans and credit cards have also risen since October.
Several factors are contributing to the limited impact of rate cuts, including the gradual approach taken by the BOE and the new Labour government’s expansionary fiscal policy. The rise in gilt yields has reduced the chancellor’s headroom against her fiscal rules, with S&P Global Ratings estimating that 80% of moves in 10-year Treasury yields are reflected in UK government bonds.
The situation is particularly acute in the UK, where the five-year sterling swap rate trades around 3.9%, close to its peak in 2024. In contrast, the equivalent rate in the euro-area has fallen to about 2.2% from 3% last year. The US market is also influencing the UK’s bond yields, with S&P Global Ratings estimating a correlation of 0.8 between UK gilts and US Treasuries.
The limited impact of rate cuts has raised concerns among economists, including Andrew Goodwin, chief UK economist at Oxford Economics. “There’s a danger that markets will struggle to digest the messages that the MPC gave,” he said. The BOE’s next move is likely to be closely watched, with many expecting further interest-rate reductions in the coming months.
Source: https://finance.yahoo.com/news/bailey-wants-cut-borrowing-costs-070000139.html