Borrowing costs are rising as Trump wins, fueling fears of inflation

Borrowing costs soared on both sides of the Atlantic yesterday as the election of Donald Trump cast further doubt on the trajectory of post-British rate cuts.

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

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

And the president-elect’s plans for tax cuts, while welcomed by households and businesses, could also reignite inflationary pressures in the US, while his policies, if fully implemented, could add £6 trillion to the US national debt.

His victory came just a week after British Chancellor Rachel Reeves laid out plans for £40 billion in tax rises and a flood of borrowing to finance spending pledges.

Returns on the US government’s ten-year demand for government bonds for the whole of 2023, but also for periods of five and ten years.

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 the rallies elsewhere faded as traders digested the impact his policies might have on the broader economy.

Consultancy Capital Economics suggested the bond market jitters could thwart Trump’s ambitions for deeper tax cuts, in addition to those implemented during his first administration.

“The bond watch is on the move and the risk of an even bigger negative reaction could intimidate Republicans into abandoning another large package of deficit-financed tax cuts,” analysts said.

“In that scenario, we expect they will limit themselves to extending Trump’s original tax cuts, which expire at the end of 2025.”

Kallum Pickering, chief economist at broker Peel Hunt, said: ‘So far, global markets have tolerated US fiscal largesse well. The risk is that this will no longer be the case if Trump triggers a serious wave of inflation in the US.”

He said the election result “is unlikely to impact the Federal Reserve’s likely decision to cut rates this week – or the likely cut in December either,” but added: “The trend is toward a potentially more inflationary policy mix could hamper the Fed’s ability to continue operating. the course with cuts at successive meetings up to and including 2025.’

Jane Foley, senior currency strategist at Rabobank, said the Federal Reserve’s rate-cutting cycle could be over early next year as policymakers respond to the inflationary impact of rates.

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