Pointless Being the Point
Yesterday, UK Chancellor Rachel Reeves delivered her Spring Budget to the House of Commons. Since the government’s first budget last year, bond markets have not been kind to the Chancellor, taking its angst out in the form of higher yields. The selling (and increased issuance) of UK gilts has inevitably created elevated borrowing costs that has in turn made the government’s fiscal ambitions and outlook increasingly unstable.
As had been reported in the days leading up to the budget, the Chancellor was not seeking to raise taxes. Therefore, all the Chancellor had to play with yesterday in order to keep the bond market in order was spending cuts. The Chancellor did show some restraint on spending although reading between the lines near term spending is still due to increase although with limited fresh gilt issuance. Ultimately the budget amends the fiscal outlook for this Parliament very little, which ultimately was likely the aim. Instead, the Labour Party will be hoping for increased economic fortunes in order to revise longer dated fiscal reforms announced yesterday.
So far, the market’s reaction has been positive with yields remaining well within recent ranges. The test is far from over with an estimated fiscal headroom shy of £10bn. Sterling watchers will remember the market’s reaction to the Chancellor’s autumn budget seemed to have a delayed fuse. GBP will continue to be a good barometer of market sentiment also with any move higher in yields unlikely to have its usual positive correlation with the currency. We did witness a marginal sell off in GBP yesterday which was likely as much a result of an inflation statistic miss earlier in the day as it was the risk associated with the Chancellor’s budget announcement. Therefore, it is likely still too early to conclude the demise of the Pound.
Discussion and Analysis by Charles Porter
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