(Bloomberg) — Bank of England interest-rate cuts are not feeding through to borrowing costs for households and the government, making it harder for Chancellor Rachel Reeves to deliver the economic growth she has promised and repair the public finances.
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The UK has seen swap rates and gilt yields rise since the central bank began its easing cycle in August with markets increasingly driven by events in the US.
It underscores the difficult task BOE Governor Andrew Bailey faces in loosening financial conditions to aid the moribund UK economy and ease up in its fight against inflation. That’s a problem for Reeves, who needs cheaper money to help restore confidence shattered by her tax-raising budget and meet her own debt-reduction targets.
There was once again little relief for those in the real economy as the BOE lowered its benchmark rate for a third time Thursday.
The five-year sterling swap rate — which is used to price mortgages — is around 16 basis points higher than it was when the BOE pivoted to lower rates. The five-year gilt yield is up by more at this stage in the cutting cycle — 0.41 percentage points — than during any previous loosenings since the BOE became independent, except in 2007.
Rates on 75% loan-to-value mortgages — among the most popular home loans — have been rising since October, according to the BOE. Borrowing rates on personal loans and credit cards are higher than they were in the summer.
The limited passthrough may be due to the BOE taking a gradual approach to cuts and the new Labour government moving to a more expansionary fiscal policy with plans for an investment spree partially funded by extra borrowing. The rise in gilt yields has already wiped out the slender £9.9 billion ($12.3 billion) of headroom the chancellor had against her fiscal rules at the time of the Oct. 30 budget.
However, there are also concerns that UK markets are being heavily driven by the US where the Federal Reserve is set to keep interest rates restrictive and fiscal policy is expected to remain loose under President Donald Trump. S&P Global Ratings estimates that 80% of moves in 10-year Treasury yields are reflected in UK government bonds.
UK officials aren’t the only ones grappling with a divergence in short and long-term rates. US Treasury Secretary Scott Bessent said Wednesday the Trump administration is targeting lower US Treasury yields, rather than the Federal Reserve’s benchmark short-term interest rate. He noted that 10-year yields climbed after the Fed’s “jumbo rate cut” in September.
