Bond market ‘vigilantes’ could target Britain again if politicians make rash promises of spending splurges or tax cuts in the run-up to the General Election, the world’s biggest asset manager has warned.
Vivek Paul, UK chief investment strategist at Blackrock, raised the spectre of a repeat of the carnage seen in UK gilt prices in the wake of Liz Truss’s disastrous mini-Budget in September 2022.
‘As inflation falls in the UK and we get closer to the general election, political parties may be more tempted to promise looser fiscal policy – the more this occurs, the greater the likelihood of the return of the bond vigilantes,’ Paul told Bloomberg News.
The ‘vigilantes’ term refers to investors who effectively punish governments they judge to be guilty of pursuing reckless inflationary policies.
They do this by selling bonds – or parcels of debt – thereby pushing up the cost of state borrowing.
Market shock: UK gilt prices went into meltdown in the wake of Liz Truss’s disastrous mini-Budget in September 2022
They came to the fore after then prime minister Truss announced a raft of tax cuts in the mini-Budget, just weeks after unveiling a costly package to help families with energy bills.
Her plans led to a bond market crisis which threatened a meltdown of pension funds and ultimately led to the collapse of her government.
Paul’s comments express the fear that the vigilantes could return if politicians make extravagant promises to win votes.
Chancellor Jeremy Hunt faces mounting pressure to cut taxes in the run-up to the election, with the Tories trailing Labour in the polls.
Falling debt interest costs may persuade him that he has room to do so.
Meanwhile, City minister Bim Afolami blasted Labour’s big-spending green industry plans in a Bloomberg interview.
He said: ‘The bond markets are clear – Labour cannot borrow to pay for their £28billion a year unfunded spending commitment without risking a debt crisis. That means the only way to pay for Keir Starmer’s promise is higher taxes.’
With inflation falling, investors believe the Bank of England will start cutting interest rates in coming months, helping gilts rally.
But Paul said: ‘The shadow of the autumn 2022 UK gilt crisis still hangs over the pre-election debate so far.’
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