Connect with us

Published

on

How worried should Rachel Reeves be about the fact that the interest rates on government bonds have leapt to the highest level in more than a quarter of a century?

More to the point, how worried should the rest of us be about it?

After all, the interest rate on 30-year government bonds (gilts, as they are known) hit 5.37% today—the highest level since 1998. The interest rate on the benchmark 10-year government bond is also up to the highest level since 2008.

Higher government borrowing rates mean, rather obviously, that the cost of all that investment Keir Starmer has promised in the coming years will go up. And since these rates reflect longer-term expectations for borrowing costs, in practice it means everything else in this economy will gradually get more expensive.

Money blog: Billionaire Premier League owner ‘thinking of leaving UK’ after budget

There are short-term and long-term consequences to all of this. In the short run, it means it will be harder for Ms Reeves to meet those fiscal rules she set herself. Back at the budget, she left herself a (in fiscal terms) paper-thin margin of £9.9bn not to overshoot on borrowing vs her new rules.

According to Capital Economics, based on recent market moves, that margin might now have been eroded down to around £1bn.

More on Rachel Reeves

And, given that’s before the Office for Budget Responsibility (OBR) has even decided on changes to its forecasts, it’s now touch and go as to whether Ms Reeves will meet her fiscal rules. As my colleague Sam Coates reported this week, the upshot is the Treasury is poised to pare back its spending plans in the coming years – a depressing prospect given the chancellor only just set them. But that won’t be clear until the OBR’s updated forecasts are published in March.

However, fiscal rules and political embarrassments are one thing – the bigger picture is another. And that bigger picture is that the UK is being charged higher interest rates by international investors to compensate them for their concerns about our economic future – about rising debt levels, about the threat of higher inflation and about fears of sub-par growth in the years to come.

How does this compare to the Liz Truss mini-budget?

But perhaps the biggest question of all is whether, what with long-term bond yields higher now (over 5.2%) than the highs they hit in October 2022, after the infamous mini-budget (4.8%), does that mean the economy is in even more of a crisis than it was under Liz Truss?

The short answer is no. This is nothing like the post mini-budget aftermath. Investors are concerned about UK debt levels – yes. They are repricing our debt accordingly. There was even a moment for a few days after the budget last autumn when the yields on UK bonds were behaving in an erratic, worrying way, rising more than most of our counterparts.

But – and this is the critical bit – we saw nothing like the levels of panic and concern in markets that we saw after the mini-budget. But don’t just take it from me. Consider two data-based metrics that are pretty useful in this case.

The first is to consider the fact that back in October 2022 it wasn’t just that the interest rates on government bonds were rising. It was that the pound was plummeting at the same time. That’s a toxic cocktail – a signal that investors are simply pulling their money out of the country. This time around, the pound is pretty steady, and is far stronger than it was in late 2022, when it hit the lowest level (against a basket of currencies) in modern history.

Is this just a UK problem?

The second test is to ask a question: is the UK an outlier? Are investors looking at this country and treating it differently to other countries?

And here, the answer is again somewhat reassuring for Ms Reeves. While it’s certainly true that UK government bond yields are up sharply in recent weeks, precisely the same thing is true of US government bond yields. Even German yields are up in recent weeks – albeit not as high as the US or UK.

In other words, the movements in bond yields don’t appear to be UK-specific. They’re part of a bigger movement across assets worldwide as investors face up to the new future – with governments (including the UK and the US under Donald Trump) willing to borrow more and spend more in the future. As I say, that’s somewhat reassuring for Ms Reeves, but I’m not sure it’s entirely reassuring for the rest of us.

One way of looking at this is by measuring how much the UK’s bond yields deviated from those American and German cousin rates in recent months. And while there was a point, a few days after Ms Reeves’ Halloween budget, when UK bond yields were more of an outlier than they historically have been after fiscal events, in the following weeks the UK stopped being much of an outlier. Yes, it was being charged more by investors, but then given the budget involved large spending and borrowing increases, that’s hardly surprising.

Now compare that with what happened after the mini-budget, when the UK’s bond yields deviated from their counterparts in the US and Germany more than after any other fiscal event in modern history – a terrifying rise which only ended after Kwasi Kwarteng stood down. Only when Ms Truss resigned were they back in what you might consider “normal” territory.

Now, it’s hard to compare different historical moments. The mini-budget was happening at a tense moment in financial markets, with the Bank of England poised to reverse its quantitative easing. Not all of the roller coaster can be attributed to Ms Truss. Even so, comparing that period to today is night and day.

Investors are not exactly delighted with the UK’s economic prospects right now. They’re letting this be known via financial markets. But they’re certainly not horrified in the way they were after the mini-budget of 2022.

Continue Reading

Business

Ofwat chief Black to step down ahead of watchdog’s abolition

Published

on

By

Ofwat chief Black to step down ahead of watchdog's abolition

The chief executive of Ofwat is to step down within months as Britain’s embattled water regulator prepares to be abolished by ministers.

Sky News has learnt that David Black is preparing to leave Ofwat following discussions with its board, led by chairman Iain Coucher.

The timing of Mr Black’s exit was unclear on Tuesday afternoon, although sources said he was likely to go in the near future.

An official announcement could come within days, according to industry sources.

Insiders say the relationship between Mr Coucher and Mr Black has been under strain for some time.

Water industry executives said that Steve Reed, the environment secretary, repeatedly referred to the regulator’s leadership during a meeting last month.

It was unclear on Tuesday who would replace Mr Black, or whether an interim chief executive would remain in place until Ofwat is formally scrapped.

More from Money

The complexity of the impending regulatory shake-up means that Ofwat might not be formally abolished until at least 2027.

Mr Black took over as Ofwat’s permanent boss in April 2022, having held the position on an interim basis for the previous 12 months.

He has worked for the water regulator in various roles since 2012.

If confirmed, Mr Black’s departure will come with Britain’s privatised water industry and its regulator mired in crisis.

Water companies are under increasing pressure from Mr Reed, the environment secretary, over their award of executive bonuses even as the number of serious pollution incidents has soared.

The UK’s biggest water utility, Thames Water, meanwhile, is on the brink of being temporarily nationalised through a special administration regime as it tries to secure a private sector bailout led by its creditors.

In a review published last month, the former Bank of England deputy governor Sir Jon Cunliffe recommended that Ofwat be scrapped.

He urged the government to replace it with a new body which would also incorporate the Drinking Water Inspectorate and absorb the water-related functions of the Environment Agency and Natural England.

Speaking on the day that Sir Jon’s recommendations were made public, Mr Reed said: “This Labour government will abolish Ofwat.

“Ofwat will remain in place during the transition to the new regulator, and I will ensure they provide the right leadership to oversee the current price review and investment plan during that time.”

A white paper on reforming the water industry is expected to be published in November with the aim of delivering a reset of the industry’s performance and supervision, according to industry sources.

A handful of water companies have challenged Ofwat’s price determinations, which in aggregate outlined £104bn in spending by the industry during the 2026-30 regulatory period.

Anglian Water, Northumbrian Water and Southern Water are among those whose spending plans are now being assessed by the Competition and Markets Authority.

Responding to the Cunliffe report last month, Ofwat said: “While we have been working hard to address problems in the water sector in recent years, this report sets out important findings for how economic regulation is delivered and we will develop and take this forward with government.

“Today marks an opportunity to reset the sector so it delivers better outcomes for customers and the environment.

“Ofwat will now work with the government and the other regulators to form this new regulatory body in England and to contribute to discussions on the options for Wales set out in the report.

“In advance of the creation of the new body, we will continue to work hard within our powers to protect customers and the environment and to discharge our responsibilities under the current regulatory framework.”

Ofwat has been contacted for comment about Mr Black’s future, while the Department for Environment, Food and Rural Affairs (DEFRA) has also been approached for comment.

Continue Reading

Business

BP raises prospect of more job losses as AI drives efficiency

Published

on

By

BP raises prospect of more job losses as AI drives efficiency

BP has signalled an accelerated effort to bring down costs ahead, refusing to rule out further job losses as artificial intelligence (AI) technology helps drive efficiencies.

The company, which revealed in January that it was to axe almost 8,000 workers and contractors globally as part of a cost-cutting plan, said alongside its second quarter results that it was to review its portfolio of businesses and examine its cost base again.

Money latest: Aldi ‘loses cheapest supermarket title’

BP is under pressure to grow profitability and investor value through a shareholder-driven refocus on oil and gas revenues.

Just 24 hours earlier, the company revealed progress through its largest oil and gas discovery, off Brazil’s east coast, this century.

BP said it was exploring the creation of production facilities at the site.

It has made nine other exploration discoveries this year.

More from Money

BP’s share price has lagged those of rivals for many years – a trend that investors have blamed on the now-abandoned shift to renewable energy that began under former boss Bernard Looney.

BP interim CEO Murray Auchincloss, takes part in a panel during the ADIPEC, Oil and Energy exhibition and conference in Abu Dhabi, United Arab Emirates, Monday Oct. 2, 2023. (AP Photo/Kamran Jebreili)
Image:
BP boss Murray Auchincloss is facing shareholder pressure to grow profitability

His replacement, Murray Auchincloss, has reportedly come under shareholder pressure to slash costs further, with the Financial Times reporting on Monday that activist investor Elliott was leading that charge based on concerns over high contractor numbers.

Mr Auchincloss said on Tuesday that AI was playing a leading role in bolstering efficiency across the business.

In an interview with Sky’s US partner CNBC, he said: “We need to keep driving safely to be the very best in the sector we can be, and that’s why we’re focused on another review to try to drive us towards best in class… inside the sector, and technology plays a huge part in that.

“Just technology is moving so fast, we see tremendous opportunity in that space. So it’s good for all seasons to drive cost discipline and capital discipline into the business. And that’s what we’re focused on.”

When contacted by Sky News, a BP spokesperson suggested the company had no plans for further job losses this year and could not speculate beyond that ahead of the conclusions of the new cost review.

BP reported a second quarter underlying replacement cost profit of $2.4bn, down 14% on the same period last year but well ahead of analyst forecasts of $1.8bn. Much of the reduction was down to lower comparable oil and gas prices.

It moved to reward investors with a 4% dividend increase and maintained the pace of its share buyback programme at $750m for the quarter.

BP said it was making progress in driving shareholder value through both its operational return to oil and gas investment and cost reductions, which stood at $1.7bn over the six months.

Shares, up 3% over the year to date ahead of Tuesday’s open, were trading 2% higher in early dealing.

Derren Nathan, head of equity research at Hargreaves Lansdown, said of the company’s figures: “Production increases, strong results from trading activities, favourable tax rates, and better volumes and margins downstream all played their part.

“It’s also upping the ante when it comes to exploration and development, culminating in this week’s announcement of an oil find at the offshore Brazilian prospect Bumerangue.

“Its drilling rig intersected a staggering 500m of hydrocarbons. Taking into account the acreage of the block, it’s given BP the confidence to declare the largest discovery in 25 years.”

Continue Reading

Business

British Land hires lawyers to scrutinise retail rescue deals

Published

on

By

British Land hires lawyers to scrutinise retail rescue deals

British Land, the FTSE 100 commercial property company, has hired lawyers to scrutinise rescue deals for the high street retailers Poundland and River Island.

Sky News has learnt that Hogan Lovells, the City law firm, has been instructed by British Land to seek further information on restructuring plans that the two chains say are necessary for their survival.

British Land owns 20 Poundland stores, 13 of which would see rents compromised under its restructuring plan, while it is River Island’s landlord at 22 shops – seven of which would be affected.

Money latest: Aldi ‘loses cheapest supermarket title’

Retail industry sources said that British Land had already struck deals to re-let some of the affected Poundland sites.

The company, which has a market capitalisation of ? and is one of Britain’s biggest commercial landlords, is understood to have abstained on the River Island restructuring plan vote.

The appointment of Hogan Lovells does not amount to a decision to formally challenge the restructurings, but that remains an option in both cases, according to industry sources.

More from Money

Hogan Lovells has been engaged on a string of previous challenges to retailers’ rescue deals on the basis that they unfairly compromised property-owners.

About 20,000 jobs would potentially be put at risk if Poundland and River Island were to collapse altogether.

Both face sanctions hearings in court this month which will determine whether their rescue deals can go ahead.

Even if the proposals are rubber-stamped, about 100 stores in aggregate across the two chains will be permanently closed.

British Land declined to comment.

Continue Reading

Trending