Rachel Reeves may have to consider ‘very severe’ spending cuts if the recent rise in UK borrowing costs eats away at her fiscal headroom, a former Bank of England deputy governor has warned,Sir John Gieve told Radio 4’s Today Programme that the recent bond market turmoil was not in response to UK policy changes – instead, he argues, gilt yields have simply been following the US market,Gieve says:This is very different from the Truss debacle, in that it’s not a response to anything we’ve done in the UK,Gieve explains that the UK’s long-term borrowing costs tend to follow US government debt (Treasury yields have risen as investors have anticipated higher inflation under Donald Trump),Before Reeve’s budget, US 10 year Treasurys were yielding 3.

6pc, now yielding 4.7pc.Seems to me that if there is a risk of a Liz Truss moment it is in the US.At least the UK has a plan for debt/deficit reduction.Zero evidence of that in the US!Gieve says the UK is “a bit more vulnerable” to bond market moves, as it already spends over £100bn per year on debt interest, and last autumn’s budget showed a marked increase in borrowing over the next few years.

Yesterday, Treasury minister Darren Jones insisted repeatedly that the UK was fully committed to its fiscal rules, to reassure markets.Gieve says, though, that it is becoming “clearer and clearer” that this will be “very difficult”, and require a lot of “new, difficult, decisions”.That’s because October’s budget showed a substantial increase in spending this year, but then a slowdown to a little over 1% per annum in subsequent years.So, if health and defence spending have to rise by more than 1%, this will require cuts in many other programmes, and those have not been announced.Gieve says:“The choice she [Rachel Reeves] is going to face in the spending review [due in June] and then the budget in the autumn, is ‘can I raise borrowing?’ – and the increase in interest rates that’s happened now, if it continues, will decrease her scope for doing that within her rules.

‘Or do I increase taxes again?Or do I actually institute some very severe reductions and squeezes on public services?’”The bottom line, Gieve adds, is that if the UK economy doesn’t grow by much more than 1%, we can’t afford to increase spending by much more than 1%.That’s why growth is so important, but recent figures have been “discouraging”.A burst in housebuilding might provide a short-term boost to growth, he suggests.The UK’s winter gas storage levels have dropped to “concerningly low levels” following the ongoing cold snap, energy provider Centrica has warned.Centrica has revealed that as of yesterday, the UK has less than a week of gas demand in store, as a spike in energy demand due to the freezing weather put pressure on gas reserves.

UK storage sites are 26% lower than last year’s inventory at the same time, Centrica reports, leaving them around half full.Centrica says:The UK’s gas storage is under pressure this winter as the UK battles both extreme cold and high gas prices.The ongoing colder-than-usual conditions in the UK combined with the end of Russian gas pipeline supplies through Ukraine on 31 December 2024 has meant that gas inventory levels across the UK are down.But, the situation is echoed across Europe, where people are also shivering.On 7 January, European storage was at 69% capacity, down from 84% at the same time the previous year, Centrica reports.

Centrica is also arguing that the UK needs more long-duration energy storage, to help balane the system as it becomes increasingly reliant on renewablesChris O’Shea, Group CEO at Centrica, says:“Energy storage is what keeps the lights on and homes warm when the sun doesn’t shine and the wind doesn’t blow, so investing in our storage capacity makes perfect economic sense.We need to think of storage as a very valuable insurance policy.”The pound isn’t the only currency having a rough time against the resurgent US dollar.The Swiss franc has dropped to its weakest level since the end of May, trading as low at 0.9138 per dollar this morning.

Data earlier this week showed a drop in Swiss inflation, to 0.6% in December, which could clear the way for the Swiss central bank to cut interest rates.Although the markets for US assets are calmer today than earlier in the week, there’s a palpable nervousness in the City about the outlook for gilts and the pound.Mark Dowding, BlueBay CIO at RBC BlueBay Asset Management, says his firm takes a negative view on UK assets:Dowding explains:Politically, the official growth forecast for 2025 (2%) is already looking ambitious and is likely to be re-rated lower in March, adding to spiralling deficit concerns.Higher borrowing costs are feeding back into a deteriorating fiscal profile, and there is a growing sense that the Labour government will break its own fiscal rules and be forced to renege on its promise not to raise taxes further, given the high sensitivity around additional borrowing and cuts to public spending.

RBC BlueBay remains bearish on UK assets as the firm continues to envisage a fiscal and political downward spiral.Deutsche Bank are recommending selling the pound “on a broad, trade-weighted basis,” explaining that sterling has lost recent sources of support.Deutsche’s Shreyas Gopal says:The current account deficit is likely no longer improving, and volatility-adjusted yield pickup appears at risk of worsening further.Update: Deutsche also say:“With the trade-weighted sterling index still sitting just over 2% off its post-Brexit highs, we think there’s further to go in the recent pound weakness.”The boss of Sainsbury’s has warned that the increase in national insurance contributions paid by companies will make it cautious about hiring new staff this year.

Sainsbury’s CEO Simon Roberts told reporters:“We’ll have to look very carefully at all hiring decisions.”Back in November, Sainsbury’s said the Nics increase announced in last year’s budget would cost it £140m per year, and might lead to price rises.The pound has recovered from its early morning swoon, and is now flat on the day at just over $1.23.The jump in UK borrowing costs has not, yet, fed through to mortgage rates, it seems.

Data provider Moneyfacts has reported that the average rates for fixed-term mortgages are unchanged today.They report:The average 2-year fixed residential mortgage rate today is 5.47%.This is unchanged from the previous working day.The average 5-year fixed residential mortgage rate today is 5.

25%,This is unchanged from the previous working day,This means the average two-year fixed rate is the same as on Monday, while five-year fixed rates are just 0,01 percentage point higher this week,Fixed-rate mortgages are priced off the yields on government bonds, so if this week’s rises are sustained, lenders might have to raise rates….

Lisa Nandy, the UK culture secretary, has tried to provide some reassurance about rising gilt yields this morning,She told BBC Radio 4’s Today programme:“This is a global trend that we’ve seen affecting economies all over the world,Rates rise and fall,We’ve seen it, most notably in the United States, but we are confident that we’re taking both the short term action to stabilise the economy, but also the long term action that is necessary to get the economy growing again,”Separately she told Sky News:“I don’t think we should be worried.

..We are still on track to be the fastest growing economy, according to the OECD, in Europe.”UK bond yields are moving a little higher, though we’re still below the peaks hit yesterday.The yield on 10-year gilts is now up four basis points (0.

04 percentage points) to 4.839%, while 30-year gilt yields are 3.5bps higher at 5.4%.In normal times, these would not be newsworthy moves, but as 10-year borrowing costs hit the highest since 2008 this week, there’s much more scrutiny than usual.

Michael Brown, senior research strategist at Pepperstone, says:There remains clear concern over the likelihood that all of the Chancellor’s fiscal headroom has now been eaten up by the sell-off in Gilts, and the anaemic nature of UK economic growth.One worrying aspect of the market turmoil this week is that both UK government bonds and the pound have fallen.In more normal times, a rise in government yields – or borrowing costs – (caused by a fall in the value of bonds) tends to lead to a stronger currency.That’s because higher bond yields typically indicate higher interest rates, which mean a higher rate of return on the currency, lifting its value.When a country’s bond prices and a currency both fall together, it can be a sign of fiscal de-anchoring, and potentially of capital flight out of the UK.

This last happened in the 1970s crisis, a point another former Bank official Martin Weale made yesterday, when he warned that recent events echo the 1976 debt crisis “nightmare” that forced the government to ask the International Monetary Fund for a bailout.Friday's Scottish Daily Mail Front Page: UK faces crisis like the 1970s, Reeves warned #TomorrowsPapersToday Visit our homepage at https://t.co/s1vdxIYHYd for the latest breaking news and sport pic.twitter.com/mdoInnrMJASir John Gieve, though, says things are different today.

In 1976, then chancellor Denis Healey had to abandon a flight to an IMF meeting to return to the Labour Party conference and give a rousing speech defending the need for spending cuts and a bailout.Gieve says:I don’t think Rachel Reeves is going to have to cancel her trip to China.But, he adds, the recent rise in borrowing costs is “partly a growing realisation that her budget didn’t really settle the fiscal probem we face, the choice between expenditure and more tax for the longer term has still to be taken.”Rachel Reeves may have to consider ‘very severe’ spending cuts if the recent rise in UK borrowing costs eats away at her fiscal headroom, a former Bank of England deputy governor has warned.Sir John Gieve told Radio 4’s Today Programme that the recent bond market turmoil was not in response to UK policy changes – instead, he argues, gilt yields have simply been following the US market.

Gieve says:This is very different from the Truss debacle, in that it’s not a response to anything we’ve done in the UK.Gieve explains that the UK’s long-term borrowing costs tend to follow US government debt (Treasury yields have risen as investors have anticipated higher inflation under Donald Trump).Before Reeve’s budget, US 10 year Treasurys were yielding 3.6pc, now yielding 4.7pc.

Seems to me that if there is a risk of a Liz Truss moment it is in the US.At least the UK has a plan for debt/deficit reduction.Zero evidence of that in the US!Gieve says the UK is “a bit more vulnerable” to bond market moves, as it already spends over £100bn per year on debt interest, and last autumn’s budget showed a marked increase in borrowing over the next few years.Yesterday, Treasury minister Darren Jones insisted repeatedly that the UK was fully committed to its fiscal rules, to reassure markets.Gieve says, though, that it is becoming “clearer and clearer” that this will be “very difficult”, and require a lot of “new, difficult, decisions”.

That’s because October’s budget showed a substantial increase in spending this year, but then a slowdown to a little over 1% per annum in subsequent years.So, if health and defence spending have to rise by more than 1%, this will require cuts in many other programmes, and those have not been announced.Gieve says:“The choice she [Rachel Reeves] is going to face in the spending review [due in June] and then the budget in the autumn, is ‘can I raise borrowing?’ – and the increase in interest rates that’s happened now, if it continues, will decrease her scope for doing that within her rules.‘Or do I increase taxes again?Or do I actually institute some very severe reductions and squeezes on public services?’”The bottom line, Gieve adds, is that if the UK economy doesn’t grow by much more than 1%, we can’t afford to increase spending by much more than 1%.That’s why growth is so important, but recent figures have been “discouraging”.

A burst in housebuilding might provide a short-term boost to growth, he suggests.The City seems unimpressed by Sainsbury’s financial results, even though it reported sales growth ahead of the wider market for seven consecutive quarters.Sainsbury’s are the top faller on the FTSE 100 share index at the start of trading, down 2.5%.Investors may be disappointed that Sainsbury’s didn’t lift its profit forecasts today.

Instead, the company says it expects to meet forecasts for underlying operating profits, and hit the midpoint of its guidance range of £1,01bn to £1,06bn,All eyes are on the UK government bond market today, where the current bond market selloff has been particularly acute,And in early trading, bond yields are nudging slightly higher, although it’s a small move,The yield (or interest rate) on 10-year UK gilts is up 2 basis points, or 0.

02 percentage points, at 4,82%,Long-dated 30-year UK bond yields are almost 2bp higher, at 5,38%,Jim Reid, market strategist at Deutsche Bank, says:The global bond selloff showed few signs of letting up over the last 24 hours, with long-term borrowing costs continuing to move higher across the board.

The UK was particularly in the spotlight, as its 10yr gilt yield (+1.5bps) hit another post-2008 high of 4.81%, whilst the 30yr yield (+2.2bps) hit a post-1998 high of 5.37%