Interest rate cut: How the market reaction poses a political problem for the new chancellor

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Sky's Ian King explains how the response seen in UK government bond yields threatens the narrative outlined by Rachel Reeves on the need for tax rises.

The market reaction to today's interest rate cut from the Bank of England has been very interesting indeed. Sterling, as one might have expected, fell against both the dollar and the euro - although some market participants raised an eyebrow that the bulk of the decline against the greenback, in particular, came before news emerged that the monetary policy committee had cut Bank rate.

It is clear the chancellor proposes to frame those tax increases as an unpleasant decision forced on her by the state of the public finances. Something she would rather not be doing were circumstances better. However, if government borrowing costs continue to fall - and the market is already pricing at least one further rate cut from the Bank of England this year - it becomes harder for Ms Reeves to make that argument, since she will be shelling out less money on interest payments.

 

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