UK economy can ‘turn corner’ despite bond market chaos, says chancellor
Rachel Reeves is preparing to make the case that the UK economy is on the cusp of a genuine recovery, even as turbulence in global bond markets continues to rattle investors and push government borrowing costs to their highest levels in decades. The chancellor is expected to deliver a bullish assessment of Britain’s economic prospects in the coming days, insisting that the fundamentals remain sound despite the volatility.
Bond yields spike amid global jitters
UK gilt yields climbed sharply this week, with the 10-year yield briefly touching 4.9% — a level not seen since 2008. The spike has been driven in part by persistent inflation fears and uncertainty over US trade policy, which has spooked bond markets from Tokyo to London. For Reeves, the timing is awkward. She has precious little fiscal headroom under her own self-imposed spending rules, and rising yields make government debt significantly more expensive to service. Every 0.1 percentage point rise in gilt yields costs the Treasury hundreds of millions of pounds a year.
But the chancellor’s allies are pushing back against what they call a pessimistic narrative. “The underlying growth story hasn’t changed,” one Treasury official said. “Business investment is picking up, wages are outpacing inflation, and employment remains resilient.”
Defence spending row adds pressure
John Healey, the Defence Secretary, has also found himself drawn into the economic debate. His department is lobbying hard for a commitment to raise defence spending to 2.5% of GDP by 2027, a pledge that would cost roughly £7 billion a year and leaves the Treasury with an even tighter squeeze. Healey insists the spending is necessary. Reeves insists the books must balance. So far, no firm date has been announced.
That tension alone tells you something about just how constrained this government actually is.
Can the numbers actually hold up?
The Office for Budget Responsibility is due to produce updated forecasts in the spring, and there’s real anxiety inside No 11 that those numbers could force another round of painful choices. Growth in the third quarter of 2024 came in at a meagre 0.1%, and business confidence surveys have been mixed at best since the October Budget raised employer national insurance contributions.
Still, Reeves appears determined to hold the line. She’s expected to point to falling mortgage rates, a stabilising housing market, and early signs of consumer spending recovering as evidence that the corner, as she’d put it, is genuinely within reach. Whether the bond markets agree is another question entirely.
