Bank of England Governor Andrew Bailey has warned that long-term structural pressures and major economic shocks could continue to push up government debt and borrowing costs across advanced economies.
Speaking at a conference hosted by the London School of Economics’ Trium MBA programme, Bailey said economies were facing “very, very substantial challenges” that could put further pressure on government finances.
He identified weak productivity as one of the key factors contributing to rising public debt, while noting that major economic shocks, including the COVID-19 pandemic, had also increased the burden on governments.
Bailey also pointed to ageing populations and growing demands for higher defence spending as additional pressures that governments would have to manage.
According to Bailey, these developments help explain the pressure on bond markets, where investors have increasingly demanded higher returns to hold government debt.
Government bond yields have risen sharply in recent months, with Britain’s 10-year borrowing costs reaching their highest level in nearly two decades earlier this week. Longer-term yields also climbed to their highest level since 1998.
Bailey was among the majority of members of the Bank of England’s Monetary Policy Committee who voted in July to keep interest rates unchanged, as policymakers awaited clearer evidence of the impact of the Iran war on longer-term inflation.
Markets on Friday priced in about a 10% probability of a 0.25 percentage-point interest rate increase at the MPC’s next meeting this month, while the probability of a hike at the following meeting in November was above 60%.
Goodness Anunobi
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