UK markets steadied on Friday, offering some reassurance to Rachel Reeves as investors, policymakers and business continue to digest the scale and implications of her first Budget.
Testified on Thursday An unusually large increase In the cost of UK government borrowing in response to the massive package of tax rises and increased borrowing.
Yields on the UK’s benchmark 10-year bond – the interest rate the government pays to borrow money – rose to their highest level this year, by 0.1% to 4.52%.
This wasn’t a Liz Truss moment. Kwasi Kwarteng Mini Budget It sparked the biggest single-day increase in more than two decades and pushed the pound down 8%.
Money Blog: Mortgage markets are starting to react to the budget by raising interest rates and withdrawing
But the move was significant enough to create such a crisis that Ms Reeves’ opponents, some of whom were in Liz Truss’s government at the time, were quick to exploit.
Interpreting financial markets is a complex and imprecise science – those who master it tend to make more money than journalists – but the rise appears to be a response to two factors.
First, a small premium to the increased demand for UK debt as a result of spending Borrowing plans Bigger than markets expected.
Second, there is the possibility that this huge budget will be inflationary, thus slowing down the Bank of England’s plans to cut interest rates. Bond prices are driven and informed by fundamental rates, and if markets believe the bank will leave them higher for longer, this reverses.
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Officially the government does not comment on market movements, but Reeves’ unexpected interview with Bloomberg financial specialists on Thursday afternoon, and the appearance of her second aide Darren Jones on a tour on Friday morning, spoke of a desire to calm any tremors.
Maybe it worked. After an initial bullish spasm on Friday morning, government bond yields eased, falling below their opening price on Thursday morning by lunchtime before rising in the afternoon in line with US Treasuries.
Budget latest: Rachel Reeves says watchdogs have given her budget a ‘clean bill of health’
They ended the week higher than before the Budget, which could be interpreted as a small but final ‘risk premium’ for the UK.
Meanwhile, the pound has regained the cent it has lost against the dollar since Reeves sat in the House of Commons on Wednesday afternoon.
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What happens next will be partly determined by the Bank of England’s monetary policy committee, which meets next Thursday. In addition to deciding on interest rates, it will produce new expectations for growth and inflation which may further shape investor sentiment.
It remains highly likely that interest rates will be cut by at least 0.25 percentage points to 4.75%, with a 90% chance of a similar cut at Christmas at the next meeting in late December. This would be welcome news for consumers, not to mention Reeves.