Chancellor Rachel Reeves sought to reassure the financial markets after her Budget sparked a sell-off in UK bonds by stressing the Government remained committed to “economic and fiscal stability.”
She insisted the Government would adhere to “robust fiscal rules” and that there is a “significant” fiscal consolidation over the course of this Parliament. “We have now put our public finances on a stable and a solid trajectory,” she said.
The Chancellor’s two key rules are to have tax receipts cover day-to-day spending and for debt to be falling as a share of the economy. “We meet both our stability and our investment rule two years early,” Reeves said. “That should give confidence, alongside what the International Monetary Fund said,” she told Bloomberg TV.
She was speaking after the Government’s borrowing costs hit their highest point this year as a sell-off of bonds accelerated.
The yield – or interest rate – on a 10-year government bond rose 0.1 percentage points to 4.45 per cent, having climbed above 4.50 per cent earlier in the day. The two-year yield climbed 0.11 percentage points to 4.42 per cent, earlier rising to 4.568 per cent, the highest point since August 2023.
Critics claimed the increased cost of Government debt was a sign that financial markets are unnerved by the size of the Government borrowing requirement amid claims the Chancellor had overestimated the desire for more debt.
Shares fell as investors lost hope of bigger interest rate cuts over the next year after judging the Bank of England would cut rates more slowly due to bigger-than-expected government borrowing and spending-fueled inflation.
The value of the pound also fell, losing as much as 0.7 per cent against the euro, one of its biggest falls since former prime minister Liz Truss’s mini-Budget caused market panic.
Asked to comment on the fall in bond prices, a Government spokesperson said: “We don’t comment on market movements.”
“The Chancellor has been very clear that first and foremost, this Budget has been about restoring fiscal stability, and she’s outlined two new robust fiscal rules, which put public finances on a sustainable path,” the spokesperson said.
Susannah Streeter, head of money and markets at investment firm Hargreaves Lansdown, said: “Fresh nervousness has crept into markets about the prospects for the UK economy, just a day after Rachel Reeves delivered Labour’s first Budget for 14 years.
“Initial financial market reaction was sanguine, but investors appear to have taken flight after picking over the bones of the huge tax and spending plans.
“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. Bond yields are set to stay volatile, as institutions financing government borrowing keep a more suspicious eye trained on what the swollen investment budget will be spent on.”
Kathleen Brooks, research director at XTB, said it was evidence the Chancellor had “overestimated” the market’s desire to absorb more Government debt.
“Unfunded borrowing to invest is seemingly treated the same way as unfunded tax cuts. Higher public spending is not what investors want to see,” she added.
“They do not want the public sector to crowd out the private sector, and they also don’t like tax burdens that are so high they threaten future growth rates.
“It’s different for the UK compared to our peers. In France etc, where public spending levels are high, they have Germany as their north star of fiscal prudence. The US has the world’s reserve currency, so they are also given more leeway. The UK does not have this.
“This is not the outcome that the Government wanted from this Budget, and it has trashed their credentials of stable fiscal management.”
“Looking ahead, there will need to be some damage control, and we would not be surprised if some measures are rolled back on. The new Government now know the limit of the bond market to its spending plans. UK shares are down the pound is also under pressure, suggesting that it is also cowering from the bond vigilantes.”
Evelyne Gomez-Liechti, at Mizuho International, said: “There seems to be an inflation panic at the moment. Investors are still worried about how inflationary the Budget may be, how loose it is, and how much it can change the [Bank of England’s] reaction in cutting rates.”