There have been two notable responses to the rise in yields on UK gilts – government debt – in recent days. The first is to point out that the interest rates businesses and mortgage holders pay will rise even further. This will be painful. As Nicholas Macpherson, the former Treasury permanent secretary, has argued, it is likely that the Bank of England will raise rates to a level where a recession next year becomes inevitable.
This, of course, has significant political implications. The Conservatives’ path to re-election is very dependent on reducing inflation as quickly as possible and ensuring living standards are rising by October 2024. As I argued in March, the fact the UK economy has outperformed the dismal predictions of late 2022 might initially seem like good news for Rishi Sunak but if it turns out that higher growth is accompanied by persistent inflation, he has a problem. The economic and political cycles now increasingly look misaligned from the government’s perspective.
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