Well, let's get back to the UK now and after this week of market term il as you say, Steven, guilt yields continuing to rise this morning. But what does it mean for the Chancellor and the Bank of England as they are in China. Let's join now Martin Wheal, former member of the Bank of England's Monetary Policy Committee who's now professor of economics at King's College, London. Good to see you, Martin. Hello, Once upon a time you told me in the list of here it was all going to end in tears. You were right, we had it that way again. Or do you agree with Darren Jones, Reeves's deputy, that these moves are.

Well, let's get back to the UK now and after this week of market term il as you say, Steven, guilt yields continuing to rise this morning. But what does it mean for the Chancellor and the Bank of England as they are in China. Let's join now Martin Wheal, former member of the Bank of England's Monetary Policy Committee who's now professor of economics at King's College, London. Good to see you, Martin. Hello, Once upon a time you told me in the list of here it was all going to end in tears. You were right, we had it that way again. Or do you agree with Darren Jones, Reeves's deputy, that these moves are.

Orderly Well, I rather take the view that the moves, certainly, the very recent ones, have been fairly small. No, two or three basis points doesn't seem very much to me. On the other hand, if we look at the bigger picture, interest rates are high, both at the short term and the long term relative to economic growth, and that does create a problem in managing the national debt. And it's much more of a problem than it would have been, say, twenty years ago, because the debt is loved relative to national income. First as a result of the financial crisis and secondly as a result of the COVID epidemic.

Orderly Well, I rather take the view that the moves, certainly, the very recent ones, have been fairly small. No, two or three basis points doesn't seem very much to me. On the other hand, if we look at the bigger picture, interest rates are high, both at the short term and the long term relative to economic growth, and that does create a problem in managing the national debt. And it's much more of a problem than it would have been, say, twenty years ago, because the debt is loved relative to national income. First as a result of the financial crisis and secondly as a result of the COVID epidemic.

What does that mean then, for what the Chancellor needs to do Now, if you see these moves as being more in the orderly line, does she not need to take action or does this mean we're more likely to have to have more dramatic steps.

What does that mean then, for what the Chancellor needs to do Now, if you see these moves as being more in the orderly line, does she not need to take action or does this mean we're more likely to have to have more dramatic steps.

Well, I think we now have to move on to the issue of the fiscal rules. Now, fiscal rules are arbitrary, and Britain has had a remarkable number of fiscal rules. But I must say I think one thing that Wood fright and market would be for the Chancellor to do what so many conservative chancellors didn't change the fiscal rules again just so that she can meet them. So if that's an option that you have to rule out, and I think it probably does have to be ruled out, a change to the fiscal rules might be one thing that could trigger a Liz Trus episode and no tears tomorrow morning. So that leaves either tax increases or spending cuts if the fiscal rule gets close to being broken, and everyone's expectation is that it will get close to being broken. On the other hand, it's the OBR that will produce a forecast, and that's coming in March. Well.

Well, I think we now have to move on to the issue of the fiscal rules. Now, fiscal rules are arbitrary, and Britain has had a remarkable number of fiscal rules. But I must say I think one thing that Wood fright and market would be for the Chancellor to do what so many conservative chancellors didn't change the fiscal rules again just so that she can meet them. So if that's an option that you have to rule out, and I think it probably does have to be ruled out, a change to the fiscal rules might be one thing that could trigger a Liz Trus episode and no tears tomorrow morning. So that leaves either tax increases or spending cuts if the fiscal rule gets close to being broken, and everyone's expectation is that it will get close to being broken. On the other hand, it's the OBR that will produce a forecast, and that's coming in March. Well.

Indeed, Reeves indicated to us that she would choose spending cuts over tax rises if the headroom have operated, and she had to make that choice. But is there enough in efficiency savings that she could calm the market? Do you think would it really actually need to be austerity?

Indeed, Reeves indicated to us that she would choose spending cuts over tax rises if the headroom have operated, and she had to make that choice. But is there enough in efficiency savings that she could calm the market? Do you think would it really actually need to be austerity?

Well, no, chancellors always, or incoming chancellors in particular, always like the idea of efficiency savings. We know that's the grammar phone record that keeps being used. And I think the truth is, no one's terribly clear where there efficiency savings and where there aren't. No Productivity in the National Health Sir, for example, has fallen since the epidemic, and understanding why that's happened is important. It may point the way to increasing productivity again. But you can't say that there's just a clear list of efficiency savings cut to public spending that can be made that no one will notice. I mean, reading or hearing about the dreadful news from California over the last few days, no one wonders how far the los people of Los Angeles were keen to limit public spending, and maybe at least on fire prevention. No one would think they should have spent a bit more.

Well, no, chancellors always, or incoming chancellors in particular, always like the idea of efficiency savings. We know that's the grammar phone record that keeps being used. And I think the truth is, no one's terribly clear where there efficiency savings and where there aren't. No Productivity in the National Health Sir, for example, has fallen since the epidemic, and understanding why that's happened is important. It may point the way to increasing productivity again. But you can't say that there's just a clear list of efficiency savings cut to public spending that can be made that no one will notice. I mean, reading or hearing about the dreadful news from California over the last few days, no one wonders how far the los people of Los Angeles were keen to limit public spending, and maybe at least on fire prevention. No one would think they should have spent a bit more.

Well, yeah, there's that political expectation of public services, but there's also the economic impact. If there's austerity, does that just trap the UK in a doom loop in terms of growth?

Well, yeah, there's that political expectation of public services, but there's also the economic impact. If there's austerity, does that just trap the UK in a doom loop in terms of growth?

Well, I think in terms of growth, the issue is that we don't actually have a terribly good understanding of what drives productivity growth in the short term. Of course, there's been an element of concern because we've seen weaker growth figures, But what really matters in terms of the viability of the national debt is longer term growth, and there we have the problem of course that since the crisis, productivity growth has been much weaker than it used to be. No, is there the risk of a doom loop? Well, there is a problem and no, as I say, that problem is the size of the national debt and the interest rate bill that goes with it, And no, there's not an easy way round that.

Well, I think in terms of growth, the issue is that we don't actually have a terribly good understanding of what drives productivity growth in the short term. Of course, there's been an element of concern because we've seen weaker growth figures, But what really matters in terms of the viability of the national debt is longer term growth, and there we have the problem of course that since the crisis, productivity growth has been much weaker than it used to be. No, is there the risk of a doom loop? Well, there is a problem and no, as I say, that problem is the size of the national debt and the interest rate bill that goes with it, And no, there's not an easy way round that.

Is the UK's doubt unsustainable at this point?

Is the UK's doubt unsustainable at this point?

No, I don't think it's unsustainable, but it does create problems. It does impose a tax bill.

No, I don't think it's unsustainable, but it does create problems. It does impose a tax bill.

At what point do you see that becoming a possibility? I mean, if we're talking about yields at four point eight four percent. And to your point of the cast that weighs on the public finances, is there, what's the scary level?

At what point do you see that becoming a possibility? I mean, if we're talking about yields at four point eight four percent. And to your point of the cast that weighs on the public finances, is there, what's the scary level?

Well, I don't think there's any particular scary level. What matters is both, of course, the interest rate and the size of the debt. The interest rate is perhaps likely to change more quickly, but with debt approximately equal to GDP, you can see that a one percentage point increase in the interest rate, and we have to remember that a lot of the UK debt is no finance that the short term interest rate. Now a one percent increase in the interest rate creates a one percent point increase in the tax bill. Of course, the government gets some of that back from the tax on interest payments on the national debt, but it's still a very material amount. Can more be collected in taxation, Yes, it obviously can. But the problem there that the Chancellor has is the promise she made that she was only putting up taxes once and that the more general issue that the Labor government agreed not to or said they wouldn't increase of any of the main revenue raising taxes.

Well, I don't think there's any particular scary level. What matters is both, of course, the interest rate and the size of the debt. The interest rate is perhaps likely to change more quickly, but with debt approximately equal to GDP, you can see that a one percentage point increase in the interest rate, and we have to remember that a lot of the UK debt is no finance that the short term interest rate. Now a one percent increase in the interest rate creates a one percent point increase in the tax bill. Of course, the government gets some of that back from the tax on interest payments on the national debt, but it's still a very material amount. Can more be collected in taxation, Yes, it obviously can. But the problem there that the Chancellor has is the promise she made that she was only putting up taxes once and that the more general issue that the Labor government agreed not to or said they wouldn't increase of any of the main revenue raising taxes.

So on a great before the election and now we're in difficult different climate Martin. What should the Bank of England's role and response be in all this? Was it really responsible for Reeves and Bailey to be jetting off to China this weekend?

So on a great before the election and now we're in difficult different climate Martin. What should the Bank of England's role and response be in all this? Was it really responsible for Reeves and Bailey to be jetting off to China this weekend?

Well, I think it was perfectly responsible for them to be going to China. As I say, I don't have the sense of a market panic, more an issue that is going to be addressed but doesn't need to be addressed on Monday.

Well, I think it was perfectly responsible for them to be going to China. As I say, I don't have the sense of a market panic, more an issue that is going to be addressed but doesn't need to be addressed on Monday.

But then what's the role for the Bank of England, Like, does this change the rate path this year?

But then what's the role for the Bank of England, Like, does this change the rate path this year?

Well, I think the Bank of England will be concerned about the risk of no perceptions of inflationary pressures. They'll be focused on inflation. If interest rates generally are higher, then it will be harder for them to cut rates. I mean, we have seen a reduction in the expectation of the number of interest rate cuts this year, and I think that knows in keeping with my thinking.

Well, I think the Bank of England will be concerned about the risk of no perceptions of inflationary pressures. They'll be focused on inflation. If interest rates generally are higher, then it will be harder for them to cut rates. I mean, we have seen a reduction in the expectation of the number of interest rate cuts this year, and I think that knows in keeping with my thinking.

So you see the two interests, right gods that are being priced in by markets this year. That looks right to you.

So you see the two interests, right gods that are being priced in by markets this year. That looks right to you.

Well, it looks perfectly plausible to me. I can't say there's a single right answer and a single wrong answer, but it seems to me to make quite a lot of sense.

Well, it looks perfectly plausible to me. I can't say there's a single right answer and a single wrong answer, but it seems to me to make quite a lot of sense.

Coming back to that promise that was made by Rata Reeves and an Kostarmer, we should say before the election as well. Do they just need to abandon it now? Is the situation so significantly different that they need to rethink their policy?

Coming back to that promise that was made by Rata Reeves and an Kostarmer, we should say before the election as well. Do they just need to abandon it now? Is the situation so significantly different that they need to rethink their policy?

Well, I think it would be difficult to abandon it now, which is why if there a budgetary adjustment is needed, everyone is expecting it to take place in terms of spending cuts rather than tax increases. Could I see some circumstances in which they will have to eat their words? I think the answer is yes.

Well, I think it would be difficult to abandon it now, which is why if there a budgetary adjustment is needed, everyone is expecting it to take place in terms of spending cuts rather than tax increases. Could I see some circumstances in which they will have to eat their words? I think the answer is yes.

What would those circumstances look like?

What would those circumstances look like?

Well, if, for example, interest rates rise considerably further and I can't particular number on because no I'm not the OBR.

Well, if, for example, interest rates rise considerably further and I can't particular number on because no I'm not the OBR.

And when you look at the UK, not just the Bank of England but also Rachel Reeves as well, how much do you think we're at the mercy of global markets? Of course, you've got the US jobs report coming out today. Are our leaders really in control of their own destiny here?

And when you look at the UK, not just the Bank of England but also Rachel Reeves as well, how much do you think we're at the mercy of global markets? Of course, you've got the US jobs report coming out today. Are our leaders really in control of their own destiny here?

Well, it's always the case that no international bond bond yield movement no play a major role in the British economy and I think people are quite right to say that the problem is an international problem. Interest rates have been rising internationally, but at the end of the day, you still have to pay the interest on the national debt.

Well, it's always the case that no international bond bond yield movement no play a major role in the British economy and I think people are quite right to say that the problem is an international problem. Interest rates have been rising internationally, but at the end of the day, you still have to pay the interest on the national debt.

Is the UK particularly vulnerable though, I mean, if you look at the spread, for example, over French debt, they have their own problems no budget for this year just one example there, and also a heavy debt burden. Is the UK at more of a mercy of international investors.

Is the UK particularly vulnerable though, I mean, if you look at the spread, for example, over French debt, they have their own problems no budget for this year just one example there, and also a heavy debt burden. Is the UK at more of a mercy of international investors.

Well, I suppose the euro and the credibility of the Euro does offer the French government some sort of stability. One could see a situation where it would become a problem instead of a support. But at the moment it looks to me as though it's functioning as a support. The UK as a small or medium sized country trying to make the most of things, and it is very badly affected by well at the moment, with interest rates rising, it's affected by what's happening in the United States. And if interest rates look like staying higher this afternoon after the jobs report, then we may well see a further increase in UK yield.

Well, I suppose the euro and the credibility of the Euro does offer the French government some sort of stability. One could see a situation where it would become a problem instead of a support. But at the moment it looks to me as though it's functioning as a support. The UK as a small or medium sized country trying to make the most of things, and it is very badly affected by well at the moment, with interest rates rising, it's affected by what's happening in the United States. And if interest rates look like staying higher this afternoon after the jobs report, then we may well see a further increase in UK yield.

Just on that point, I mean, there's so much uncertainty about what Donald Trump's going to do. He's constantly posting on social media. A press conference yields dozens of headlines on dozens of issues. How are you thinking though about his tariffs and there impact if you were modeling that, there's so much debate about how it will impact us here. What should we look ahead to?

Just on that point, I mean, there's so much uncertainty about what Donald Trump's going to do. He's constantly posting on social media. A press conference yields dozens of headlines on dozens of issues. How are you thinking though about his tariffs and there impact if you were modeling that, there's so much debate about how it will impact us here. What should we look ahead to?

Well, Tariffs I think aren't good news. Restrictions on trade flows aren't generally good news, and they do make people worse off. Now, that of course, can be true internationally as well as nationally. There are some circumstances in which, no, if the tariff imposing country has very strong market power, it can actually drive global prices down so far that its price is actually fall rather than going up. Whether we're in that or whether the United States is in that sort of situation isn't clear, but or may be discovered after the tariffs are imposed. But tariffs certainly aren't good news, and they may have an adverse impact on economic growth. On the other and no, the United States finds it easier to borrow than we do. And if they're part of a package which actually involves an overall cut in taxation, it's perfectly possible that at least in the short term. Notwithstanding that the United States has debt issues with the size of its debt as well, we may in the short term actually see no slightly faster growth in the United States.

Well, Tariffs I think aren't good news. Restrictions on trade flows aren't generally good news, and they do make people worse off. Now, that of course, can be true internationally as well as nationally. There are some circumstances in which, no, if the tariff imposing country has very strong market power, it can actually drive global prices down so far that its price is actually fall rather than going up. Whether we're in that or whether the United States is in that sort of situation isn't clear, but or may be discovered after the tariffs are imposed. But tariffs certainly aren't good news, and they may have an adverse impact on economic growth. On the other and no, the United States finds it easier to borrow than we do. And if they're part of a package which actually involves an overall cut in taxation, it's perfectly possible that at least in the short term. Notwithstanding that the United States has debt issues with the size of its debt as well, we may in the short term actually see no slightly faster growth in the United States.

Martin. Just to conclude, drawing on your experience, I wonder what is the best comparison to understand the challenges facing the UK and the government at this moment in time. We're talked about all the various levels of uncertainty being faced. The debt is larger. Where should we be looking into history to try and give us an idea of the scale of the challenge.

Martin. Just to conclude, drawing on your experience, I wonder what is the best comparison to understand the challenges facing the UK and the government at this moment in time. We're talked about all the various levels of uncertainty being faced. The debt is larger. Where should we be looking into history to try and give us an idea of the scale of the challenge.

Well, the debt is larger, it's back to where it was in the nineteen sixties. But in the nineteen sixties we had all sorts of mechanisms designed to suppressed the cost of the national debts. So most people won't remember exchange control. But to give a no my own memories of life, then you had to take your passport to the bank to get foreign currency if you wanted a foreign holiday, and there were stiff controls on operating foreign bank accounts and so on. No one expects us to go back to that, so we are much more at the mercy of world market. We have seen no more substantial sell offs in the guilt market. The Liz Trus episode was one, the nineteen seventy six episode was another. People then made a lot of the fact that Britain had to ask the IMF for help. Well, that was essentially asking for IMF approval of UK policies, rather than being in desperate need of liquidity to manage in the short term. So I suppose nineteen seventy six, the Liz Truss episode I would see as the indicators of this, not of the situation we are in, but of the situation we could get into.

Well, the debt is larger, it's back to where it was in the nineteen sixties. But in the nineteen sixties we had all sorts of mechanisms designed to suppressed the cost of the national debts. So most people won't remember exchange control. But to give a no my own memories of life, then you had to take your passport to the bank to get foreign currency if you wanted a foreign holiday, and there were stiff controls on operating foreign bank accounts and so on. No one expects us to go back to that, so we are much more at the mercy of world market. We have seen no more substantial sell offs in the guilt market. The Liz Trus episode was one, the nineteen seventy six episode was another. People then made a lot of the fact that Britain had to ask the IMF for help. Well, that was essentially asking for IMF approval of UK policies, rather than being in desperate need of liquidity to manage in the short term. So I suppose nineteen seventy six, the Liz Truss episode I would see as the indicators of this, not of the situation we are in, but of the situation we could get into.