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A UK interest rate cut next month is looking slightly more likely, City predictions suggest.
An August rate cut is now seen as an 81% probability, according to the money markets this morning. That’s up from around 75% earlier this week.
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Reeves reaffirms importance of fiscal rules
Rachel Reeves has just spoken at an event to launch the UK’s new 10-year health plan.
My colleague Andrew Sparrow reports that Reeves is smiling a lot as she says the plan will get the NHS “back on its feet”.
And she says she has only been able to invest in public services by sticking to her fiscal rules.
She does not refer to what happened in the Commons yesterday at PMQs.
NEW: A beaming Rachel Reeves speaks at launch of govt’s 10-year plan for NHS, in attempt to draw a line under speculation over her future.
Chancellor also takes opportunity to remind everybody of her fiscal rules: “Our commitment to our fiscal rules means that we can boost…
— Pippa Crerar (@PippaCrerar) July 3, 2025
Health secretary Wes Streeting praised Reeves at the event too, saying she has put an extra £29bn into the NHS.
Streeting said:
It is thanks to her leadership that we’ve seen interest rates in our country fall four times. It’s thanks to her leadership that we see wages finally rising faster than the cost of living. And it’s thanks to her leadership we have the fastest growing economy in the G7.
Andy’s Politics Live blog has all the action:
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Morgan Stanley predicts tax hikes in the autumn
The UK government is more likely to raise taxes in the autumn budget than attempt spending cuts, predicts Morgan Stanley economist Bruna Skarica.
Skarica told clients this morning that the UK could potentially face a £30bn miss versus their fiscal framework in the autumn – £1bn from u-turning on winter fuel payments, £5bn from the delay to welfare reform, plus a potential £20bn hit if the Office for Budget Responsibility lowers its growth forecasts.
Skarica points out that “to govern is to choose”, and suggests three options:
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Find alternative spending cuts. This, we think, would be challenging. Indeed, in our mid-year outlook we noted that our “our main concern going into the autumn is…that the existing departmental spending plans look very tight…It seems almost inevitable that current spending will be topped up”;
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Raise taxes. Hiking income, corporation or value-added taxes would breach Labour’s manifesto commitments, but we estimate it would be challenging to amass revenues of more than £10bn from increasing other levies and surcharges.
In our mid-year outlook, we noted that the effective rate of income tax in the UK looks relatively low for median earners, implying that reversing the recently cut employee NICs could be one option for the Treasury to consider.
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Fiscal rules could be altered. The rising risks of this option, we think, is what drove the adverse market action [on Wednesday]. UK fiscal rules are self-imposed and can be adjusted by the Treasury.
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Elsewhere in the economy, demand for mortgages appears to be weakening.
British lenders expect demand for mortgages will fall over the coming three months, according to new data from the Bank of England.
The BoE’s quarterly Credit Conditions Survey shows that more lenders expect a drop in secured lending in the next three months.
Continued uncertainty dries up future lending demand over the summer holidays.
In the @bankofengland ’s Credit and Conditions survey demand for secured lending for house purchases and remortgaging was reported to have increased in Q2, and was expected to further growth in the… pic.twitter.com/Zmlk95B5PT
— Emma Fildes (@emmafildes) July 3, 2025
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Uk 10-year bond yields have also recovered quite a lot of yesterday’s jump, as this post from Mohamed El-Erian (who we heard from earlier) shows:
Further to yesterday’s post, UK gilt yields have retraced a significant portion of yesterday’s sharp widening. This follows, and is in reaction to the Prime Minister’s strong public support for Rachel Reeves in last night’s interview with the BBC’s Nick Robinson.#economy #bonds… pic.twitter.com/F1zVIglepA
— Mohamed A. El-Erian (@elerianm) July 3, 2025
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Prime minister Keir Starmer has “brought a sense of calm to markets” by backing Rachel Reeves, says Dan Coatsworth, investment analyst at AJ Bell.
Coatsworth explains:
“Starmer declaring his support for the chancellor has led to gilt yields pulling back and sterling rebounding after yesterday’s slump against the dollar. The initial sell-off in gilts and the pound was the market’s way of saying it was losing faith in the economic outlook and political stability.
“It was an electric shock for investors but today’s rebound suggests that crisis has been averted, at least for now. UK economically sensitive assets were in relief mode, including a rally in housebuilders and banks.
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UK service sector posts strongest growth in 10 months
Newsflash: Britain’s services sector has grown at its fastest pace in 10 months, in a boost to the UK government.
Data firm S&P Global has reported that UK service providers have reported “a sustained expansion of business activity in June”.
Activity grew at the fastest rate since August 2024, lifted by growing improvement in order books, according to the latest poll of purchasing managers at UK services firms.
This lifted S&P Global’s UK Services PMI to 52.8 in June, up from 50.9 in May and the highest for 10 months. Any reading over 50 shows a rise in activity.
Companies attributed the pick-up to “generally improving business and consumer spending”, despite “subdued UK economic conditions, the impact of US tariffs and adverse geopolitical factors”, the report says.
Tim Moore, economics director at S&P Global Market Intelligence, explains:
“June data highlighted a modest rebound in UK service sector growth, fuelled by a turnaround in domestic business and consumer spending after a soft patch during the spring. Business activity expansion was slightly stronger than the earlier ‘flash’ estimate for June and the fastest seen since August 2024.
While total new work picked up in June, shrinking export sales were a constraint on service sector growth. Survey respondents cited headwinds from US tariffs and geopolitical tensions, which resulted in subdued demand conditions across global markets.
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UK bonds claw back losses after PMQs
Britain’s 30-year bonds have almost recovered to their levels before yesterday’s sharp sell-off.
The yield, or interest rate, on 30-year debt has now dropped by almost 10 basis points (0.1 percentage point) to 5.31%, down from 5.4% last night.
At noon yesterday, they were trading at 5.29%, before worries over Rachel Reeves’s future sparked a bond selloff, pushing up yields (which rise when price fall).
A chart (in GMT) showing UK 30-year bond yields Photograph: LSEGShare
Currys boss urges government not to raise taxes further
Sarah Butler
The boss of Currys, the UK’s biggest electrical goods retailer has urged the government not to increases taxes for retailers this year, warning it would “further dampen investment and increase prices.”
Reporting a 37% jump in pre-tax profit to £162m in the year to 3 May and the revival of dividend payment to shareholders after two years as sales rose 3% to £8.7bn, Alex Baldock, the chief executive of Currys said:
“We urge government not to make a further contribution to the tax burden as that would further dampen investment and increase prices in an inflationary way. I would urge government ot think very carefully before making the situation worse.”
He said that Currys had increased sales at established stores by 6% in the UK, helped by a 12% surge in sales of services including repairs, financing and mobile subscriptions.
Baldock said the wider electrical goods market had been flat in the UK and there were concerns about cheap electrical goods being dumped in the UK via online marketplaces amid new taxes on imports of such goods to the US and planned changes in the EU.
Baldock said he welcomed the government’s promise that it would look at the so-called de minimus rules, which allow tax breaks on low value goods worth sent directly to consumers, but would “urge some urgency” on making changes. In the UK, the threshold for import duty is £135, while items valued at £39 or less also do not attract import VAT.
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UK gilts are “firming up this morning along with the pound” after the PM gave his chancellor much more vigorous backing, says Neil Wilson, UK investor strategist at Saxo Markets.
He says Reeves is probably the “the most market-friendly chancellor Labour could field”.
But, the government has a deeper problem – the market is getting nervous about its ability to make the sums add up whether Reeves is ‘market-friendly’ or not.
Wilson adds:
Despite the backing from the PM, or perhaps because of it, the question for investors right now is: will she leave? The market reaction should proclaim that she is required at No11 to avert a market response that delivers a death blow to the government; the prime minister is now giving her his full backing.
The PM can’t control his backbenchers, but maybe the bond market can. The reaction could keep her in the job. But doubts remain and we might see continued pressure on gilts as we head into the autumn. And often when a PM has to constantly state his backing for a minister the writing is on the wall.
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Peel Hunt: three options for Reeves’s future
The market’s attention is now turning to whether Chancellor Rachel Reeves is really as safe as Prime Minister Keir Starmer has suggested, says Kallum Pickering, chief economist at UK investment bank Peel Hunt.
Pickering suggests there are three possible outcomes, writing:
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Reeves stays because Starmer realises that markets see her as less bad than the alternatives and because, put plainly, history shows that Prime Ministers who sack their Chancellors rarely last long either;
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Reeves is replaced by a presumed safe pair of hands (such as Pat McFadden) once markets have settled – but to restore credibility her replacement will need to stare down and win a budget fight with the far-left fringe of the Labour Party, which now appears to be the tail that wags the dog on fiscal policy; or
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Starmer may brief against Reeves to suggest she is the reason Labour promised not to raise the big three taxes (income tax, VAT and employee NI) before forcing her to raise one of them at the budget to get the finances on track, then sack her and let her to take the blame for the fiscal failures during the first 18 months in office.
Pickering also warns that the next few days and weeks may be choppy in the run-up to 9 July, when the pause on Donald Trump’s ‘Liberation Day’ tariffs is due to end.
Following on from my initial reaction yesterday, a few more thoughts on the situation in UK bond markets:
1. For all the talk about big market moves, we must not lose sight of the fact that GBP/USD is up 9% year-to-date (see chart) and a 4.6% handle on a 10-year gilt is pretty… https://t.co/FesrBjcmGu pic.twitter.com/KXW97yyz91
— Kallum Pickering (@KallumPickering) July 3, 2025
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Updated at 09.05 BST
The drop in yields on shorter-term UK bonds will be a relief to households looking to take out a mortgage (or remortgage).
As the BBC’s Faisal Islam points out, those products are priced off the cost of UK government borrowing:
Gilt yields tumbling back down to where they were before PMQs after PM’s interview with @bbcnickrobinson giving full support to Chancellor.
Down 9-10 basis points (ie 0.1% points) across the board and so eg 5 year back below 4% (important for fixed mortgages)…
— Faisal Islam (@faisalislam) July 3, 2025
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Rachel Reeves has the backing of the bond market, argues Kathleen Brooks, research director at XTB.
Brooks says yesterday bond market sell-off reflected concerns about what may come in the autumn budget; and is also a reminder to “the hard left of the Labour party that the UK economy cannot afford its benefits bill”.
Brooks writes:
After the watered down welfare reform bill, the focus was on the need to raise taxes and to potentially issue more borrowing to cover the cost of Labour’s plans.
However, the bond market revolt suggests that these two options are not viable when national debt is so high and the economy is so weak. The bond market is telling the Chancellor to get on with the job of reducing unsustainable levels of public sector spending, but will she listen?
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The pound is pushing higher too!
Sterling has now gained a third of a cent against the US dollar, up to $1.366.
That means it has recovered roughly a third of yesterday’s tumble.
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UK bonds rally as panic eases
The bond market is looking calmer this morning, as traders welcome Keir Starmer’s endorsement of Rachel Reeves.
The prices on UK government debt are rising in early trading, which pulls down the yield (or interest rate) on the bonds.
The yield on UK 30-year bonds has dipped by 0.8% in early trading, to 5.361%. Yesterday it had surged to 5.408%, from 5.234%.
UK 10-year bond yields have also dipped by around three basis points, to 4.55% from 4.58% last night.
These moves suggests the bond markets are relieved that Starmer is standing by Reeves, easing concerns that a new chancellor might be less committed to the fiscal rules, so might look to borrow more.
But while today’s recovery eases some of the pressure on the government, it doesn’t wipe out all of Wednesday’s jump in borrowing costs – traders will be wondering how the government will patch up the multi-billion pound black hole in the public finances.
Shorter-dated two-year and five-year bond yields have also slipped back, as prices recover some ground.
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Updated at 09.33 BST
El-Erian: bond sell-off would add £1.8bn to government spending, if it sticks
The jump in UK borrowing costs yesterday will have added to Rachel Reeves’s fiscal problems, unless it reverses.
Mohamed El-Erian, chief economic advisor to insurance giant Allianz, has calculated that Wednesday’s rise in bond yields would add £1.8bn to government spending each year, “if it sticks”.
He told Radio 4’s Today programme that it’s “very hard” to take a risk premium out of markets, explaining:
The minute you put a risk premium in the marketplace, it’s very hard to take out. I suspect that we will see some moderation, but we will not go back to where we were 24 hours ago.
El-Erian says investors have been reminded that the UK’s fiscal problem is “deep”; without growth, we face a “vicious cycle where every action you try to take is either economically problematic or politically problematic,” he adds.
He then warns that Reeves’s fiscal headroom of about £10bn (the margin before she breaks her fiscal rules) is “essentially gone”.
That means she must find at least £10bn of measures in autumn’s budget, and that bill will go up if growth slows or borrowing costs rise further.
And that money may have to come from taxes.
El-Erian explains:
So the area left are the two taxes that the Labour government ruled out in the election, income tax and VAT. They are your major sources of tax revenue.
No one likes them, but in a world like this, they will become better than the alternatives.
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Pound calm as Starmer backs Reeves
After a tough day yesterday, the pound is calmer in early trading.
Sterling is marginally higher (+0.08%) against the US dollar today, at $1.3646, having dropped by a cent yesterday.
The calm follows backing for Rachel Reeves from Keir Starmer.
He told the BBC that the Chancellor has done a “fantastic job”, adding:
“She and I work together, we think together. In the past, there have been examples – I won’t give any specific – of chancellors and prime ministers who weren’t in lockstep. We’re in lockstep.”
That may reassure investsors worried that Reeves could be replaced, and that a new chancellor would be less enthusiastic about controlling borrowing.
Simon French, chief economist at investment bank Panmure Liberum, argues that “almost all other Chancellor options from within the parliamentary Labour Party” are less market friendly options.
French told clients:
Recent weeks have shown that large parts of the parliamentary Labour Party in the UK do not have the stomach for the tough fiscal choices required in a normalised interest rate environment, amidst sluggish productivity growth, with the tax burden at an eight-decade high, and with a deteriorating demographic profile.
The lack of a working majority for its economic plans leaves the Labour government with an intractable problem – its credibility with financial markets hinges on adherence to a set of fiscal rules that are incompatible with its manifesto tax commitments, and the plans outlined at the recent Spending Review.
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Updated at 07.26 BST
Introduction: Bonds and sterling in spotlight after Wednesday wobble
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
All eyes are on UK bonds, and the pound, after both fell sharply yesterday amid speculation over the future of chancellor Rachel Reeves.
Wednesday was a turbulent day for the UK bond market; prices of British government debt fell heavily as investors were gripped by concerns of change at the top of the Treasury. The selloff highlights anxiety that the government’s u-turn on welfare reform has blown a multi-billion pound black hole in the chancellor’s budget plans.
Bonds slumped, driving up borrowing costs, after Keir Starmer failed initially to give his full backing to Reeves at prime minister’s questions, with a tearful chancellor alongside him.
A chart showing the yield on UK government bonds
The pound also suffered, falling by a cent against the US dollar as it slid from $1.3745 to $1.3636, making it the worst-performing major currency in the world.
Starmer has now defended Reeves, saying her tears were due to a “personal matter” and insisted she will remain chancellor “for a very long time to come”.
The bond selloff may actually have reinforced Reeves’s position as chancellor, highlighting that the markets would not welcome a replacement who might be less devoted to fiscal discipline.
Andrew Wishart, economist at Berenberg Bank argues that “Investors probably saved the Chancellor”, saying:
By selling sterling assets investors have probably kept UK chancellor Rachel Reeves in her post. Financial markets initially reacted little to the government failing to get approval for savings in the disability benefit budget from its own parliamentary faction. But when the Prime Minister failed to say that a visibly upset Reeves would remain in her job during Prime Ministers Questions, UK assets sold off.
The Chancellor has become synonymous with a fiscal rule of covering day-to-day spending with tax revenue.
That fiscal rule may dictate tax rises in the autumn budget, as spending cuts could be too much of a political headache, judging by the massive rebellion against the welfare bill that has created a £5bn hole in the chancellor’s plans.
America’s economy may take the market spotlight off Reeves this afternoon, when the latest US jobs report is released. It will show whether trade war tensions have hit hiring at US businesses.
The agenda
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9.30am BST: UK service sector PMI for June
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10am BST: OECD Economic Survey of the European Union and Euro Area
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1.30pm BST: US non farm payrolls employment report for June
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