Why UK borrowing costs are so high

When analyzing UK fiscal policy, the key piece of evidence is last week’s Budget. The Budget introduced a backloaded fiscal consolidation, with small net increases in spending in the coming years followed by larger increases and assumed significant capital spending rise. The Bank of England is unlikely to be moved by these small additions to demand in the short term. Encouraging UK inflation and wage data, as well as labor market concerns, will be more important for the BoE.

Another feature of the Budget was an attempt to lower inflation by reducing some environmental levies from energy bills. Standard practice for monetary policymakers would be to look through artificial changes in inflation because they are temporary. The OBR’s quarterly inflation forecast shows a one-off fall in inflation in 2026.

Although the Budget has been in the news, it is not that significant to the country’s overall fiscal policy stance. Borrowing is projected to fall every year through the forecast, showing a sharp fiscal tightening. The UK is undergoing a fiscal consolidation that other advanced economies are not planning.

The UK’s nominal terminal and neutral interest rates are higher than other geographies, which is puzzling. The country needs to regain the trust of investors by proving its commitment to prudent public finances.

What I’ve been reading and watching

One last chart

A few weeks ago I posted the betting odds for the next Fed chair. After Trump’s announcement, the markets decisively favored Hassett. Insider trading on these markets can lead to sharp movements before official announcements.