Market Analysts: The Chancellor isn’t responsible for low gilt yields
Just before Christmas I wrote a slightly too long, slightly too techy and (probably) slightly too boring post on UK bond yields.
The yield on UK government debt is at historical lows. The government argues that this shows the market’s confidence in Osborne’s fiscal strategy and that any retreat from this would lead to higher interest rates choking off the recovery.
Last April, the absence of a credible deficit plan meant our country’s credit rating was on negative outlook and our market interest rates were higher than Italy’s. Eighteen months later and we are the only major western country which has had its credit rating improve.
Italy’s interest rates are now 7.2%. And what are ours? They are less than 2.5%. Yesterday, we were even borrowing money more cheaply than Germany.
Those who would put all that at risk by deliberately adding to our deficit must explain this.
Just a one per cent rise in our market interest rates would add £10 billion to mortgage bills every year. One per cent would mean the average family with a mortgage would have to pay £1,000 more. One per cent would increase the cost of business loans by £7 billion. One per cent would force taxpayers to find an extra £21 billion in debt interest payments, much of it going to our foreign creditors.
In other words, one per cent dwarfs any extra government spending or tax cut funded by borrowing that people propose today.
And that’s the cost of just a one per cent rise. Italy’s rates have gone up by almost 3% in the last year alone.
We will not take this risk with the solvency of the British economy and the security of British families.
Osborne then is pretty clear that his ‘tough action’ is what has kept yields low.
Interestingly enough a survey published today by financial information company Bloomberg doesn’t agree with the Chancellor.
Chancellor of the Exchequer George Osborne’s pledge to eliminate the budget deficit isn’t the main reason U.K. government-bond yields are at record lows, say most analysts in a Bloomberg survey.
The Bank of England’s quantitative-easing program, which has so far purchased a quarter of outstanding gilts, was identified as the single biggest cause by a third of 27 economists polled. Just over a quarter said investors fleeing other European bonds were driving U.K. rates lower, while 22 percent said Osborne’s plan was the main reason
One worth remembering the next time the Chancellor tries to claim the credit for record low interest rates. Whatever he might want to believe, three quarters of those who actually work in financial markets seem to think he isn’t the main reason for low yields.