The chancellor is consulting with cabinet members as market instability undermines the government’s plans.

Rachel Reeves has urged her cabinet colleagues to develop new proposals to stimulate growth amidst worries that market instability is undermining the government’s economic strategy, potentially leading to higher mortgage rates. The chancellor is set to travel to China as planned after the cost of government borrowing hit a 30-year high, surpassing the peaks seen during Liz Truss’s short tenure.

These increased rates could keep homeowners’ mortgage rates elevated for an extended period and might compel Reeves to reduce public spending in the spring budget slated for March. Certain smaller and more specialized lenders, sensitive to market fluctuations, have raised their rates. Mortgage brokers have noted that other lenders might do the same if government borrowing costs continue to rise.

“UK Faces Rising Borrowing Costs and Stagflation Risk, Triggering Potential Spending Cuts”

UK borrowing costs have increased due to investors’ concerns over the government’s high borrowing demands and the mounting risk of stagflation, a situation combining sluggish growth with persistent inflation. The pound dropped nearly 1% against the dollar on Thursday, hitting its lowest level in over a year.

Reeves is ready to announce additional spending cuts in the spring if the elevated borrowing costs eliminate the government’s fiscal cushion. The Office for Budget Responsibility, the fiscal watchdog, will update its forecasts on March 26. They are expected to highlight the deteriorating state of public finances. If that happens, Reeves will have to cut public spending for the remainder of the parliament, likely leading to significant cuts in unprotected departments.

Ben Zaranko, an associate director at the Institute for Fiscal Studies, commented: “It could lead to an even tougher spending review with larger cuts to unprotected budgets. Meeting the government’s various public service commitments might become impossible if sectors like prisons, universities, and the police are targeted.” Ministers have sought to downplay the bond market turmoil and pledged to adhere to the government’s fiscal rules. Darren Jones, the chief secretary to the Treasury, assured MPs that “UK gilt markets continue to function in an orderly manner.”

He stated: “There should be no doubt about the government’s commitment to economic stability and sound public finances. No emergency intervention is needed, nor has there been any.”

Mel Stride, the shadow chancellor, criticized Reeves for leaving the country during a “challenging time” and accused Labour of making a “panicked attempt to reassure the markets” over an economic crisis they caused. The Tories argued that Reeves should cancel her China trip to focus on stabilizing the markets. The trip means that the chancellor, Andrew Bailey, governor of the Bank of England, and Nikhil Rathi, the chief executive of the Financial Conduct Authority, will all be outside the country simultaneously.

Kathleen Brooks, research director at the online trading platform XTB, remarked on the UK’s precarious fiscal situation. She added, “The chancellor is expected to deliver a speech soon, likely concentrating on public sector spending cuts rather than tax hikes to comply with her fiscal rules. “However, the rhetoric coming from the Labour government is one of the reasons we are in this predicament initially, and there are no assurances that Reeves will manage to calm the market.”