COVID Consequences Still awaits for Reeves

With Super Thursday fast approaching, it is widely anticipated that the Bank of England (BoE) will announce its plans to unwind its Covid quantitative easing portfolio, which was a key tool used to ease further economic downturn.

Rachel Reeves will find an extra £4 billion for her budget if the BoE decides to stop selling active gilts in the markets. Since the BoE is negative on its gilt holdings, any further selling would increase the cost to taxpayers. This is because gilts are bought using taxpayers’ funds, and selling gilts at a loss would be a negative rate of return on borrowed funds.

To support day-to-day spending, Reeves decided to implement self-imposed fiscal rules to match spending with income. With the BoE losing money from gilts through loss in interest rates, the decision to pause gilt sales provides a challenge to Reeves, potentially increasing government borrowing costs by £4 billion.

What is to you

• Higher borrowing costs
  • A pause in gilt sales can push yields up on government bonds, which means higher interest rates. This means households with variable mortgage rates will face higher interest rates in the long run.
• Public Finances at Stake
  • The £4 billion burden on taxpayers will mean the government may need to raise taxes.
• Financial Market Turmoil
  • Higher borrowing costs can slow down investment and growth, which affects the supply and demand of products. Businesses may respond by increasing their price, which may result in inflation.

In short, the challenge that Reeves faces can undermine the direction of where the economy is heading to but one thing is certain: the window is closing for Rachel Reeves.