Investors are driving a surge in demand for UK bonds and the pound following the British government’s revised โbudget plans, reversing a recent sell-off and signaling renewed confidence in the UK economy. The yield on the 30-yearโ gilt fell sharply, dropping as much as 46 basis points to 4.54% – the largest daily declineโ since 2020 – while sterling rose over 1% against โขthe โdollar, reaching $1.223.
The dramatic shift comes afterโข Chancellor of theโ Exchequer Jeremy Hunt announcedโ substantial tax increases and spending โcuts intended to restore fiscal stability following the turmoilโข sparked โขby his predecessor’s unfunded tax cut โคproposals. This turnaround โimpacts pension funds, mortgage holders, andโค the broader economic outlook โฃfor the UK, potentially โaverting a crisis and setting the stage for a more enduring economic path, though significant challenges โremain.
The market reaction โฃreflects a relief that the government is taking steps to address concerns about the UK’s debt burden.Hunt’s measures, unveiled Monday, include scrapping almost all of theโ tax cutsโข announced inโ september’s “mini-budget” andโค outlining ยฃ55 billion ($63.5 billion) of fiscal tightening. This includes delayingโค planned income tax cuts, reducing public spending growth, and freezing corporation tax rates.
“The UK is now on a moreโ credible path,” said Hugh Gimber, a strategist at J.P.Morgan Asset Management. “The scale of the fiscal โtightening isโ significant โand should reassure markets that โthe government is committed to reducing debt.”
The Bank of England’s emergency intervention in โthe gilt marketโฃ last month, designed to prevent a collapse in pension funds reliant on gilt-based investments, had temporarily stemmed โฃthe bleeding. However,โค the underlying concerns about fiscal sustainability โขpersisted until Hunt’s proclamation.
Prior toโ the revised budget, the pound had fallenโ to a record lowโ against the dollar, andโ gilt yields hadโข soared, increasing borrowing costs for the government and businesses. The volatility prompted the Bank of England to delay โthe โstart of its gilt sales program.
while the immediate market response is positive, analysts cautionโ that the UK still faces significant economic headwinds, including high inflation and the risk of recession.The Office for Budget Obligation (OBR) now forecasts that the UK economy is already in recession, โand that living standards will fall byโ 7.1% over the next two years.
