Ex Bank of England chief economist warns of major threat for clients
Every year adults dread mischief night. Just what horrors might the local kids do to your house? This year, however, there is the added frisson of – what might the Chancellor do to my house?
There has already been much speculation about just what Rachel Reeves plans for us all – and plenty of leaks to attempt to settle homeowners’ nerves. But it’s pretty clear that there are no treats for homeowners in her red briefcase, just tricks – and a number of pundits have already said that a Labour borrowing spree could drive (and maybe just the threat already is driving) interest rates higher.
Read more: ‘Landlords aren’t working people’ - Starmer and Reeves face scrutiny over budget strategy
What is even scarier than Halloween and mischief night, according to at least one financial expert is something that will happen on that most British of festivals, bonfire night. Celebrated for 418 years, on November the 5 each year we burn effigies of a Catholic from York, and marvel at loud bangs and flashes in the night sky. Shortly after this year’s celebration of a failed plot to destroy the houses of parliament, UK homeowners may find they face even more significant risks to their houses in the form of mortgage rates from a second Donald Trump presidency, rather than from Rachel Reeves' Labour Budget. At least that’s according to prominent economist Andy Haldane, former chief economist of the Bank of England.
Haldane has highlighted that Trump’s economic policies, if implemented as promised, could lead to higher inflation and interest rates in the US, creating a ripple effect across global financial markets, including the UK. “If Trump makes good on what he has said economic policy-wise, which means tariffs, immigration restrictions, deportation, that means higher inflation in the US, it means lower growth in the US, and probably higher interest rates,” Haldane remarked on BBC’s Sunday with Laura Kuenssberg. “And the rest of the world will catch a cold from that.”
Comparing the two risks, Haldane downplayed concerns over the Labour Budget: “If you ask me is Donald Trump a bigger threat to UK mortgage rates than Rachel Reeves, of course he is, because what Rachel is doing in her Budget will be net good for growth and therefore net good for mortgage rates in a way that Trump would not be.”
Read more: Borrowing costs rise as Reeves budget fears spread
With the US presidential election on November 5, polls show Trump and Kamala Harris running neck-and-neck in battleground states like Michigan, Georgia, and Pennsylvania. Meanwhile, in the UK, Reeves is preparing to present her Budget on October 30, which includes borrowing plans of £20 billion to fund infrastructure investments (along with a NEW way to calculate what the government owes so that she can borrow even more).
Haldane defended Reeves’ proposed investments in public services, arguing that the additional borrowing could spur private sector investment. "If the extra £20 billion to £30 billion from the Budget is invested in transport, schools, and hospitals, that is not crowding out private investment; it is crowding it in," he said.
However, other experts, like former Bank of England governor Mervyn King, has warned that increased borrowing could raise long-term interest rates. King cautioned, “Higher borrowing means higher borrowing, and financial markets will demand a slightly higher interest rate to compensate for the debt.”
It looks like international investors believe King too. The current spread between UK and German 10-year bond yields has reached 1.94 percentage points, the highest since August 2023. This is driven by investor worries that Reeves may expand the national debt and concerns about persistent inflation.
Reeves' Budget will try to balance ambitious infrastructure spending with challenging tax hikes, including likely increases in National Insurance and capital gains tax, alongside new changes to stamp duty. While these reforms aim to fund the NHS and other priorities, they could hit certain regions, including London, particularly hard. Fuel duty might also be raised for the first time in over a decade.
Read more: Reeves’ Capital Gains Tax plans leaked
Haldane acknowledged that Reeves' fiscal plan would involve difficult trade-offs. “It was always going to be a bittersweet Budget,” he explained. “The bitter bit is the tax pill, and the sweet part is the investment part. The key for Rachel on Wednesday is that the after-taste is a sweet one—that it’s seen as being pro-growth and pro-business.”
“It’s time we ran towards the tough decisions,” Starmer’s speech for next Wednesday will say, adding the UK needs to “embrace the harsh light of fiscal reality so we can come together behind a credible, long-term plan”.
As Labour prepares to take political risks with its ambitious £40 billion package (and equally ambitious definitions of who is, or isn’t a working person), the possibility of Trump returning to the White House adds further uncertainty to the UK’s financial outlook.
What, really? Trump could make UK mortgage rates rise?
Economists argue that Donald Trump’s economic policies, if reintroduced, could lead to rising inflation in the UK due to the interconnected nature of global trade, finance, and energy markets. Of course, he is no stranger to saying one thing, and then doing the complete opposite – which could make part of their argument moot – but that uncertainty itself can roil international markets. Inflation, as we’ve learned the hard way recently, means that mortgage rates will go up, and British homes will get less affordable (again).
Though primarily aimed at the United States, his policies, if carried out as he has promised, can ripple across borders, creating challenges for economies like the UK.
One significant way Trump’s policies might affect UK inflation is through global supply chain disruptions. If the former president reintroduces tariffs or expands trade barriers with countries such as China or the European Union, it could raise the cost of goods globally. British businesses, many of which depend on complex international supply chains, would likely face higher costs for products like electronics and machinery. These increased costs would eventually trickle down to UK consumers in the form of higher prices, contributing to inflation.
Additionally, Trump’s economic actions could trigger volatility in global financial markets, weakening the British pound. Investors often seek the US dollar as a safe haven during times of uncertainty, causing other currencies, including the pound, to decline. A weaker pound makes imported goods more expensive for the UK, raising prices for food, fuel, and other essential items. This dynamic can significantly amplify inflation, as households and businesses are forced to pay more for everyday needs.
The US monetary policy response to Trump’s initiatives could also indirectly impact the UK. If Trump’s policies lead to higher inflation in the United States—through tariffs, supply constraints, or immigration restrictions—the Federal Reserve may raise interest rates to contain rising prices. When US interest rates rise, it tends to drive borrowing costs higher worldwide, including in the UK. This can affect British mortgages, loans, and business investments, as banks raise rates in response, further fuelling inflationary pressure.
Energy markets are another area of concern. Trump has previously imposed sanctions on oil-producing nations, disrupting global oil supplies. If similar policies were enacted, oil prices could rise globally, increasing transportation and energy costs in the UK, a country that heavily relies on imported energy. Rising fuel prices would not only affect household energy bills but also drive up the cost of goods, particularly food and other essentials, due to more expensive transportation.
Finally, Trump’s trade policies could impact the UK through indirect channels, such as weakening demand for British exports. If European economies suffer due to disruptions caused by US trade actions, their ability to import goods from the UK could diminish. Moreover, market confidence in the UK might falter amid heightened global uncertainty, deterring foreign investment and placing additional downward pressure on the pound - once again contributing to inflation.
