The bond markets have been jittery for weeks, but the real tremor came yesterday when Donald Trump, the US president-elect, effectively declared war on the Federal Reserve’s inflation-fighting mandate. His demand for lower interest rates, coupled with a proposed 10% across-the-board tariff and a renewed tax-cutting agenda, sent gilt yields soaring and sterling tumbling. Investors are now pricing in a 75% probability of a US rate cut by June, a move that would pour petrol on the inflation fire that the Bank of England has been desperately trying to extinguish.
The contagion is already lapping at British shores. The FTSE 250, a barometer of domestic economic health, shed 2.3% in a single session, while the 10-year gilt yield jumped 15 basis points to 4.
62%, its highest since the mini-budget crisis of 2022. Capital is fleeing UK assets as fast as it can. The message from the market is clear: fiscal discipline is for losers, and Trump is the biggest winner in town.
But what works for the American economy, with its dollar hegemony and energy independence, will not work for Britain, which imports more than a third of its goods. A weaker pound may boost exports on paper, but it also raises the cost of imported energy and food, squeezing households and pushing inflation above the 2% target for the foreseeable future. The Bank of England is caught in a vice.
If it holds rates high to defend the pound, it risks choking off investment. If it cuts to stimulate growth, it unlocks a flood of cheap money that will send inflation through the roof. Meanwhile, the Chancellor’s fiscal headroom evaporates with every tick upwards in gilt yields.
The Office for Budget Responsibility’s spring forecast now looks like a fantasy. The hard truth is that Britain’s economic fate is no longer in its own hands. It is held hostage by a Trumpian mindset that sees inflation as a feature, not a bug.
For those of us who remember the 1970s, this is a deeply unsettling rerun. The only question is whether the Bank of England has the stomach to steer against the tide. On current form, I would not bet on it.
