Borrowing costs soar as Trump victory fuels inflation fears

Borrowing costs soared yesterday on both sides of the Atlantic as the election of Donald Trump cast further doubt on the path of interest rate cuts after the UK Budget.

The Bank of England, led by Andrew Bailey, and the US Federal Reserve, chaired by Jerome Powell, are still expected to cut rates by a quarter of a percentage point today after falls in inflation in both Britain and Europe. USA.

However, investors now fear that Trump’s threats to impose heavy tariffs on imports to protect American jobs will trigger a global trade war that will drive up prices.

And the president-elect’s plans to cut taxes, while welcomed by households and businesses, could also reignite inflationary pressures in the United States, while his policies, if fully implemented, could add £6 trillion to the economy. United States national debt.

His victory came just a week after UK Chancellor Rachel Reeves unveiled plans for £40bn of tax increases and excess borrowing to fund spending promises.

Demand yields on ten-year US government bonds throughout 2023, as well as over five- and ten-year periods.

It came on a day of turmoil for global markets, as Wall Street stocks hit record highs on Trump’s plans for tax cuts and deregulation.

But rallies elsewhere faded as traders digested the consequences their policies could have on the broader economy.

Consulting firm Capital Economics suggested that bond market jitters could thwart Trump’s ambitions for bigger tax cuts on top of those implemented during his first administration.

“Bond vigilantes are getting agitated and the risk of an even bigger backlash could intimidate Republicans into abandoning another big package of deficit-financed tax cuts,” the analysts said.

“In that scenario, we would expect them to simply extend Trump’s original tax cuts, which were set to expire at the end of 2025.”

Kallum Pickering, chief economist at brokerage Peel Hunt, said: ‘Global markets have so far tolerated US fiscal largesse well. The risk is that this will no longer be valid should Trump trigger a serious outbreak of inflation in the United States.”

He said the election outcome was “unlikely to influence the Federal Reserve’s likely decision to cut rates this week, or the likely December cut,” but added: “The tilt toward a potentially stronger policy mix inflation may impede the Federal Reserve’s ability to stay the course with cuts at successive meetings through 2025.’

Jane Foley, currency strategist at Rabobank, said the Federal Reserve’s rate-cutting cycle “could end early next year as authorities react to the inflationary implications of the tariffs.”

Justin Onuekwusi, chief investment officer at wealth manager St James’s Place, said the broader global bond market could feel “domino effects” if US bond yields rise.