The unveiling of UK Chancellor Rachel Reeves’s inaugural Labour Party budget sent shockwaves rippling through financial markets, as investors grappled with the implications of a bolder-than-expected £70 billion fiscal stimulus plan. In a historic move to kickstart Britain’s sputtering economy, Reeves laid out an ambitious roadmap for revitalizing battered public services and infrastructure, with over half the tab covered by tax hikes.
Yet, the budget’s expansionary tilt promptly sparked jitters in the gilt market, pushing up government borrowing costs to their loftiest levels this year. Yields on benchmark 10-year UK sovereign bonds briefly vaulted past 4.5% as traders bet Reeves’s spending spree would compel the Bank of England to tap the brakes on anticipated interest rate cuts.
According to one City analyst, the market ructions reflected higher-than-forecast gilt issuance projections needed to fund the government’s swollen investment purse. “The stakes are now also higher for next week’s Bank of England meeting,” cautioned Deutsche Bank’s Shreyas Gopal.
Reeves Budget Rewrites BoE Script
Prior to Reeves’s budget bombshell, investors had widely penciled in the BoE to hack rates from 5% currently to around 3.75% by year-end, with an inaugural quarter-point trim expected at next Thursday’s Monetary Policy Committee confab. However, the Treasury’s independent budget watchdog, the Office for Budget Responsibility, upwardly revised its benchmark rate projections by 0.25% over the next five years, citing the additional tailwind to growth and inflation from Labour’s loosened purse strings.
In the wake of the budget, financial markets hastily reprogrammed their BoE calculators, now envisaging rates to finish 2025 closer to the 4% mark. The prospect of stickier borrowing costs soured sentiment in the gilt market, prompting a knee-jerk sell-off across the maturity spectrum.
Mini-Budget Flashbacks Overblown
For some skittish investors, the gilt rout resurrected painful memories of former Prime Minister Liz Truss’s ill-fated mini-budget, which unleashed pandemonium in the bond market. However, analysts rushed to dispel comparisons to that fiscal fiasco.
In terms of the overall market assessment this should in no way be compared to the disastrous mini-budget delivered under Liz Truss’s short reign in 2022.
– David Page and Gabriella Dickens, Axa Investment Managers
Back in September 2022, gilt yields skyroketed by a staggering 33 basis points on mini-budget day, before proceeding to surge over 100 basis points in the ensuing sessions. In contrast, the fallout from Reeves’s fiscal broadside appears far more contained, with 10-year yields jumping a comparatively modest 15 basis points at the peak of the rout.
Expansionary Pivot Tests Market Mettle
Still, the gilt market’s hostile reception to Reeves’s expansionary pivot underscores the delicate tightrope chancellors must walk in the current era of elevated inflation and jittery bond vigilantes. The budget’s pro-growth slant, while lauded by some economists as a welcome departure from the austerity-focused orthodoxy of the past decade, risks unsettling debt markets already on edge over sticky price pressures.
As one senior banker confided, Reeves’s bold fiscal prescription could present the BoE with an unwelcome inflationary headache, potentially strong-arming policymakers into keeping rates higher for longer. “The quiet optimism that appeared to be spreading during Rachel Reeves’s speech has evaporated and a higher risk premium has returned for UK debt,” remarked Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Gilt-Edged Conclusion
With the dust still settling on Labour’s inaugural budget, one thing is abundantly clear: Reeves’s reformist economic vision has set the gilt market’s pulse racing. As investors grapple with the spectre of higher borrowing costs and slower BoE rate cuts, UK fiscal policymakers are learning the hard way that bold spending plans often come with a gilt-edged price tag.
In the coming weeks, market participants will be glued to their screens, scouring incoming economic data for clues on whether the Chancellor’s growth gamble will pay off or saddle taxpayers with a heftier debt servicing bill. For Reeves, the gilt market’s hostile verdict serves as a stark reminder of the perils of wandering too far from the path of fiscal prudence in an age of bond vigilantism.
