Bank of England’s Bailey Calls for Fiscal Credibility

We’ve written a lot this year about how the UK economy has been going gangbusters, against all odds. We’ve also noted, however, that it’s been a largely jobless revival and also that it might not last much longer. A week from today the official GDP estimate for August will be published and two forecasts that landed in my inbox this morning have it coming in flat, or slightly down.

“Rising inflation, higher interest rates and a soft labour market will all drag on activity, leaving growth at little more than a crawl in Q4 and into the new year,” wrote Thomas Pugh, chief economist at RSM UK.Another bearish sign emerged today too, in the rather alarming news that credit card defaults have risen for six consecutive quarters — the worst run since the financial crisis. The data comes from the Bank of England’s credit conditions survey which ended on Sept. 4, since when borrowing costs and inflationary pressures have got even more severe.

Average mortgage rates have increased from around 5.6% on Sept. 4 to nearly 6% now, according to Moneyfacts. Petrol has risen from 163 pence to nearly 175 pence a litre over the same period, the RAC says, with diesel going from 185 pence to more than £2.

Then there are yields on government debt, which have also climbed further in the last month. We are in the midst of the third global supply shock of the decade, with sluggish growth and vast debt piles — none of which has deterred western voters from cheering on any plan for expensive giveaways or tax cuts.

The situation alarms Bank of England Governor Andrew Bailey. “At the same time [as debt grows], calls for spending to increase are louder,” he said this afternoon, with obligatory tact. Governments’ spending plans should “be directed towards stability and be seen by markets as credible.”

It’s a rare comment on fiscal matters and comes 20 days ahead of John Healey’s debut budget. The tightening of financial conditions should be furrowing the Chancellor of the Exchequer’s brow as the date draws nearer, even if he has something of a consoling thought. Tough as it might be to manage Britain’s public finances these days, it could be worse: scroll down to today’s Big Number for a reminder of how much worse.

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Markets Today: Gilt Trips

Hi, I’m Morwenna from the MT blog. Gilts have been behaving rather strangely today, but ultimately the trajectory is the same as since the start of the month: down. Yields have risen in more days than they’ve fallen this week.

The 10-year yield is near the highest in 19 years and the 30-year is very close to the highest since 1998 again.

Indeed, we’re getting closer to three rate hikes from the Bank of England being priced in by next March and four by June, which as Julian notes above, has been pushing up borrowing costs and hurting those with credit card debt. Swap rates used to price mortgages are near recent multi-year highs and will keep filtering through to deals offered by lenders, unless there’s a clear shift in direction.

Read the Markets Today live blog for rolling news and up-to-the-minute analysis during UK market hours.

The big number

38%The proportion of French corporate bonds considered safer than the country’s own sovereign debt — an almost 18-fold increase since the start of the year.

One Big Story

UK Politics Returns to a Tax Cuts Versus Big State DivideAhead of laying out a platform of tax cuts aimed at affluent Britons at her party’s annual convention, opposition leader Kemi Badenoch told journalists: “We are going back to the authentic Conservative Party that people knew and loved.”

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