Once again, we’re talking about government debt and interest rates.
At Labour’s last conference, Andy Burnham was criticised for suggesting the UK government shouldn’t pay so much attention to international financial markets and the price they charge for UK government debt. The criticism was justified: as long as the government has to borrow, it must pay close attention to the bond markets.
Right now, this matters a lot. Around 8.3% of UK government spending—over £100 billion—is going on debt interest payments. A small fall in interest rates would release huge sums for public services, while even a small rise tightens the fiscal squeeze.
Here’s the strange part.
Bank of England interest rates are falling, as the Bank believes inflation is coming down.
But the interest rates on UK government debt are edging up, because markets believe inflation will rise again.
This isn’t just a British problem. Most of the G7 countries are facing the same conundrum.
One obvious explanation is that markets are looking further ahead than central banks. Inflation may be easing in the next year or two, but over the longer term, a more protectionist global economy led by the US—tariffs, trade barriers, industrial policy—means structurally higher prices.
But there’s another factor distorting the debt markets: the sheer scale of US government borrowing.
The US now owes $37 trillion—more than the rest of the G7 combined. Normally, you’d look at debt as a percentage of GDP, but here the absolute amount matters. Because of the structure of US Treasury borrowing (a mix of short, medium, and long maturities), the US is now refinancing $0.6–1 trillion of debt every month.
This mountain of debt is the result of decades of bad political decision-making, particularly unfunded tax cuts, made possible by America’s position as the world’s reserve currency. That privileged status let them borrow cheaply.
But the world is shifting. As US politics becomes more volatile and unpredictable, countries are slowly moving away from the dollar—the de-dollarisation trend we’ve discussed before. Markets are less certain about the long-term stability of the US, its inflation path, and future interest rates. That uncertainty is pushing up the cost of borrowing for everyone else, including the UK.
https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp
I presume “GR” on that bar chart represents Germany rather than Greece?
If I’d been drawing that chart I would have either used “DE” (for “Deutschland”) instead, or used flags instead of abbreviations.
Yes, good point!