As we approach Christmas the pace has really picked up in economics and financial markets and let me start my look at the UK with an international perspective.
TOKYO (Kyodo) — The yield on Japan’s benchmark 10-year government bond hit 2.020 percent on Friday, its highest level since August 1999, after the Bank of Japan raised its key interest rate to a 30-year high of around 0.75 percent. ( The Mainichi)
They have raised interest-rates with all the enthusiasm that an Arsenal fan would feel about a Tottenham win and accordingly have lost control of the bond market. Along the way the Bank of Japan or as I have called it The Tokyo Whale is losing a fortune.We know this because as I reported back on October 2nd 2023 they dent that losses are relevant. Interestingly The Mainichi went on to another issue today.
Selling of government bonds has accelerated since Takaichi became leader in October, sparking concern about a further deterioration of Japan’s fiscal health, with the country’s debt over twice the size of its gross domestic product and already the worst among advanced economies.
Governments fiscal policy and over spending or fiscal stimulus is another factor in this game. But let me now return to the UK and look at why the Bank of England Ivory Tower has been so wrong.
The Bank of England
This was supposed to bring lower bond yields.
At its meeting ending on 17 December 2025, the Monetary Policy Committee voted by a majority of 5–4 to reduce Bank Rate by 0.25 percentage points, to 3.75%. Four members voted to maintain Bank Rate at 4%.
Instead the UK Gilt or bond future fell by half a point and it led to me having a minor spat on X or Twitter with @TrisOsborneMP.
As I have just tweeted the UK Gilt or bond market has taken quite a dive since the Bank of England decision to cut interest-rates. Thus fixed-rate mortgages are likely to be more expensive and Tris has confused “good” with “bad”
He replied.
If there is a lesson I learnt in finance. Never give a flash commentary as an absolute. You’ll find end of day it might be egg on face. Let’s see.
Perhaps he was unaware that was exactly what he had also done, But I took his timing advice and tweeted this at 9 am today.
Here is the Member of Parliament @TrisOsborneMP
trying to lecture me on the UK Gilt market. It is now 9 am the next day and at 91.07 the UK Gilt future is reinforcing my point about the bond market and fixed-rate mortgages.
The main point here though is that both the Bank of England and the political establishment have expected interest-rate cuts to feed through into lower UK bond yields. Whereas this morning the ten-year yield is 4.5% so it is 0.75% over the new Bank Rate and will give the Bank of England Ivory Tower a HAL 9000 moment or fans of The Sweet might put it like this.
Does anyone know the way? Did we hear someone say?
(We just haven’t got a clue what to do)
Does anyone know the way? There’s got to be a way
To block Buster
This really matters because these people ( there are 9 on the Monetary Policy Committee just like the Nazgul in the Lord of the Rings) embarked on one of the largest bond market punts in history when they bought £875 billion of UK government bonds. It has transpired as I have frequently pointed out that they knew nothing about it and as things keep being the opposite of what they claim you could argue they in fact have negative knowledge of it. Even worse they piled into ultra long bonds as well to maximise their losses and the opposite of my argument that the UK should issue some century bonds to take advantage of low bond yields back then.
UK Fiscal Policy
The UK has its own version of the fiscal issues I looked at regarding Japan. This morning we were told this.
Borrowing – the difference between total public sector spending and income – was £11.7 billion in November 2025; this was £1.9 billion (or 14.0%) less than November 2024 and the lowest November borrowing since 2021 (not adjusted for inflation).
Whilst the number is large it is at least not worse than last year. But the real problem comes when we use more of a perspective.
Borrowing in the financial year to November 2025 was £132.3 billion; this was £10.0 billion (or 8.2%) more than in the same eight-month period of 2024 and the second-highest April to November borrowing on record (not adjusted for inflation), after that of 2020.
Or if you prefer it in relative terms.
Borrowing in the financial year to November 2025 was provisionally estimated at 4.4% of gross domestic product (GDP); this was 0.1 percentage points more than in the same eight-month period of 2024.
We continue to have a very loose fiscal policy and whilst much of this is the responsibility of politicians rather than central bankers. It was the central bankers who made borrowing so cheap for so long with their QE bond purchases.
Also there has been another Bank of England failure with inflation. There was of course the cost of living crisis but then from the summer of 2024 they were cutting interest-rates whilst it doubled. But look what happens to the public finances when inflation falls.
The £3.4 billion interest payable on central government debt in November 2025 includes a negative capital uplift of £2.5 billion. This largely reflects the 0.4% decrease in the RPI between August and September 2025.
Those who follow my type of analysis will know that I have argued against many of the interest-rate cuts on the grounds that inflation control required more effort. As you can see this would have improved the public finances and thus been likely to lead to lower bond yields. As Nick Lowe put it.
You’ve gotta be cruel to be kind in the right measure
Cruel to be kind, it’s a very good sign
Cruel to be kind means that I love you, baby
(You’ve gotta be cruel)
You’ve gotta be cruel to be kind.
Or if you prefer you need to understand what you are dealing with.
Economic Growth
This is another factor here where simply it has been lacking and we have another example of that from this morning’s official release.
Retail sales volumes are estimated to have fallen by 0.1% in November 2025, following a fall of 0.9% in October 2025 (revised up from a 1.1% fall in our previous publication) and a rise of 0.8% in September 2025 (revised up from a 0.7% rise in our previous publication).
Such a series is erratic but if we take the latest two months together we see a 1% fall which contributes to the theme of lack of growth. The situation was probably not helped by the emergency statement from Chancellor Rachel Reeves on November 4th hinting at a rise in Income Tax. Of course she quickly U-Turned but the damage was done.
If we look for more perspective we see this.
The quantity of goods bought (volume) in retail sales is estimated to have risen by 0.6% in the three months to November 2025 compared with the three months to August 2025.
The catch is that the growth was back in September so the trend is a decline as we head into the important Christmas season. In terms of detail some of you may like to know this bit.
Non-store retailers’ volumes dipped as demand for gold slowed, while supermarkets fell for the fourth consecutive month.
Looks like UK citizens have been buying Gold and presumably Silver.
Returning to the main theme the weak Retail Sales number is particularly a concern if we factor into more recent GDP releases.
Real gross domestic product (GDP) fell by 0.1%, following growth of 0.1% in the three months to September 2025 and 0.2% in the three months to August 2025.
Comment
This is a story of institutional incompetence and sadly I see it more and more. The Bank of England has stuck its and our fingers into so many pies and all it has done is got them burnt.
The Governor of the Bank of England has warned AI is likely to displace people from jobs, comparing it to the Industrial Revolution. Andrew Bailey tells @amolrajan
the UK needs to be prepared so workers can shift into jobs that use AI. ( BBC Radio 4)
There are of course risks and dangers with AI such as the concentration of the US stock market down to 7 then 3 then maybe just 1. But all Governor Bailey has to offer is more subsidies for banks and house price pumping and indeed pimping as I pointed out on Tuesday.
First-time buyers and the self-employed could get a step-up onto the housing ladder, under new plans from the FCA.
