The Chancellor is considering a change to the Government's borrowing rules at the upcoming Budget, which would open the door to more investment spending by the stateMoves to loosen rules that limit the amount of money the Government can borrow at next month’s Budget risk interest rates staying higher for longer and banks hitting the brakes on recent mortgage rate cuts, the Chancellor has been warned.
Last year, Reeves appeared to rule out a change to the debt rule, saying she would not “fiddle the figures or make something to get different results.” If financials markets perceive that the UK Government has taken on too much debt or that its fiscal rules are not realistic, then it can react by selling off Government bonds – IOUs on debt. An impact of this can be that the Bank of England to keep interest rates high, or even raises them in order to offset this perceived extra risk with a higher return on investment.
A source who was working at the Treasury at the time said: “Doing it now in a high interest rate environment makes the Bank of England’s job harder. They’re clearly still nervous holding rates at 5 per cent, so anything that adds to the nervousness will prolong a high rate.” A senior Conservative insider added: “The more money we borrow, the higher the rates we have to offer lenders.”
Figures from UK Finance, which represents banks, suggest around 1.8m households are set to come off fixed mortgage deals next year, and will be hoping mortgage rates go lower in the meantime. Martin Weale, a former member of the Bank of England’s Monetary Policy Committee , which sets interest rates, told: “I would expect more borrowing to mean higher interest rates, but that said, I doubt that the treatment of the Bank of England losses is very material.”