Twitchy markets have been forcing up the UK’s borrowing costs in the wake of Labour’s Budget.
Yields on government bonds – known as gilts – have been creeping up again to year-highs after the Chancellor rewrote fiscal rules yesterday so she can borrow tens of billions more for investment.
The Pound has also been struggling and the FTSE 100 is down – although the latter is part of a wider international dip.
Hopes of a double interest rate cut before Christmas look to be dwindling following the dramatic package.
Goldman Sachs is among the firms now expecting rates to be kept on hold in December, instead of seeing a 0.25 percentage point reduction.
An interest rate cut from 5 per cent is still seen by analysts as likely to happen when the Bank of England‘s Monetary Policy Committee meets next week.
But the Chancellor’s huge tax and spending bonanza has raised doubts about how fast the level will fall after that.
Downing Street refused to be drawn on the market reaction, with the PM’s spokeswoman saying: ‘It’s a matter of Government policy not to comment on market fluctuations.’
Bank governor Andrew Bailey had suggested that it could be more ‘aggressive’ about rate cuts if CPI continued to subside
There are more worrying signs of jitters on the markets after the Budget, as traders push up the cost of servicing government debt
The Pound has also been struggling against the US dollar in the wake of Ms Reeves package
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Rachel Reeves on a visit to a hospital in Coventry with Keir Starmer today after delivering her Budget
The OBR watchdog believes prices will rise faster than expected over the next couple of years as a result.
It has forecast that that Threadneedle Street will respond by keeping interest rates higher for longer.
Meanwhile, GDP growth will accelerate next year due to the Government’s splurge but fall to less than 2 per cent by the end of Labour’s term in office.
The projections are grim for millions of Brits who have been hoping for relief from mortgage strain.
Optimism had been growing of a Christmas boost with two quick interest rate cuts after inflation tumbled below the Bank’s 2 per cent target for the first time in three years.
Bank governor Andrew Bailey had suggested that it could be more ‘aggressive’ if CPI continued to subside.
Goldman is now anticipating a quarter-point cut next week, before a pause, with rate dipping to 3 per cent by November next year. Previously it had forecast 2.75 per cent by that time.
Meanwhile, gilts hit levels not seen for around a year today, although the rates have been fluctuating.
The yield – or interest rate – on a 10-year government bond reached 4.568 per cent this afternoon, the highest point since August 2023.
The Pound was down 0.7 per cent against the US dollar.
Asked if the Government is disappointed about the reaction after time was spent rolling the pitch before the Budget, the PM’s spokeswoman said: ‘The approach, as we’ve said earlier in the week, the approach that we took, was to ensure that there was the proper context around the steps that we were taking … what this Budget does first and foremost is restore economic stability. I think that people have heard that direct from the Chancellor.’
Analysts said the bond movement was a sign that markets were responding negatively to the increase in spending.
Kathleen Brooks, an analyst at trading firm XTB, said the movement indicated that the Budget ‘has not been well received’ by markets.
She said: ‘This is another sign that the Chancellor overestimated the market’s desire to absorb more sovereign debt issuance from the UK.’
Kyle Chapman, an analyst at trading firm Ballinger Group, said the fall in the pound and rise in gilt yields indicated that the market had decided Labour had ‘overextended’ with its borrowing and spending plans.
Matt Britzman, an analyst at investment firm Hargreaves Lansdown, said yields will be ‘watched closely’ in the aftermath of the Budget.
He said investors are ‘re-assessing where UK interest rates might end up, given that the investment plan for growth is likely to add inflationary pressures into the economy’.
Laith Khalaf, head of investment analysis at AJ Bell, said: ‘The sizeable fiscal loosening announced by the chancellor has prompted markets to pretty much rule out two interest rate cuts this year.
‘Previously market expectations were for the base rate to fall to 4.5% by the end of this year, and then to under 4 per cent by the middle of 2025.
‘But the inflationary nature of the measures announced in the Budget are forecast by the OBR to add 0.4 per cent to CPI inflation in the next tax year, thereby putting pressure on the Bank of England to keep rates at higher levels for longer.
‘Indeed, the OBR has added 0.25 per cent to its forecasts for interest rates over the next five years to accommodate the effects of the Budget, which suggests the impact is not simply going to be a short-term blip.
‘Markets are still pricing in a rate cut from the Bank of England in November, but think that will be the lot for this year.’
The OBR said yesterday it had made its pre-measures assessment on interest rates last month.
‘The substantial fiscal easing in this Budget, boosting demand and borrowing, was not likely to have been fully anticipated by market participants at this time,’ the report said.
‘We have therefore increased our Bank Rate and gilt rate forecasts by a quarter percentage point over the five-year period in our post-measures forecast.’
The OBR expects the Bank of England will respond by keeping interest rates higher for longer, pumping up costs of servicing loans
Inflation over the next couple of years will be higher, ‘reflecting the impact of this Budget’, the watchdog added
The OBR has warned that mortgage rates are set to stay higher for longer
