Investors are driving a surge in demand for UK bonds and the pound following the British government’s revised budget plans, reversing a recent sell-off and signaling renewed confidence in the UK economy. The yield on the 30-year gilt fell sharply, dropping as much as 46 basis points to 4.54% – the largest daily decline since 2020 – while sterling rose over 1% against the dollar, reaching $1.223.
The dramatic shift comes after Chancellor of the Exchequer Jeremy Hunt announced substantial tax increases and spending cuts intended to restore fiscal stability following the turmoil sparked by his predecessor’s unfunded tax cut proposals. This turnaround impacts pension funds, mortgage holders, and the broader economic outlook for the UK, potentially averting a crisis and setting the stage for a more enduring economic path, though significant challenges remain.
The market reaction reflects 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 the tax cuts announced in september’s “mini-budget” and outlining £55 billion ($63.5 billion) of fiscal tightening. This includes delaying planned income tax cuts, reducing public spending growth, and freezing corporation tax rates.
“The UK is now on a more credible path,” said Hugh Gimber, a strategist at J.P.Morgan Asset Management. “The scale of the fiscal tightening is significant and should reassure markets that the government is committed to reducing debt.”
The Bank of England’s emergency intervention in the gilt market last month, designed to prevent a collapse in pension funds reliant on gilt-based investments, had temporarily stemmed the bleeding. However, the underlying concerns about fiscal sustainability persisted until Hunt’s proclamation.
Prior to the revised budget, the pound had fallen to a record low against the dollar, and gilt yields had soared, increasing borrowing costs for the government and businesses. The volatility prompted the Bank of England to delay the start of its gilt sales program.
while the immediate market response is positive, analysts caution 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, and that living standards will fall by 7.1% over the next two years.