Big Girls Don’t Cry
A bond market tantrum and one of the sharpest one day sell offs in Sterling for several years appear to have been catalysed by the Chancellor’s appearance in PMQs yesterday. First: the back story. This Labour government has faced some embarrassment in recent weeks trying to get its welfare bill through the lower House. Having watered down the bill twice, it passed through yesterday. This bill was key to Labour’s manifesto and budgetary pledges. Two rounds of dilution later and the bill bears very little resemblance of its former self.
Critically for the Chancellor, fearing defeat in the Commons from the vote of their own dissenting back benchers, the government conceded at the 11th hour to accept a review period before implementing the changes to universal credit proposed by the bill. This delays, and potentially even sacrifices in the case of a negative review process, the supposed £5bn of fiscal headroom created by the reforms. Markets were therefore not best pleased to see a tear roll down the face of the chancellor yesterday afternoon. There’s been a great degree of speculation over the cause of Rachel Reeves’ appearance. Was it a lack of support from her Prime Minister, was it the comments of the leader of the opposition or the personal matter that Downing Street has subsequently claimed?
A severe sell off in gilts and Sterling shows the market is questioning UK public finances and therefore the Chancellor too. Should the Chancellor leave office this would not be the first minister the bond market has claimed. On the contrary, it would be the next in a line of rapid succession post-Covid. Even if Reeves comes back from yesterday’s Commons conundrum the fact will remain that the government is almost out of fiscal headroom. The choice will be to cut spending or raise taxes if they wish to retain (some will say attract) some fiscal credibility. Until certainty is restored, Sterling will continue to be vulnerable to further bond market unrest.
Discussion and Analysis by Charles Porter
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