Financial market reaction to Rachel Reeves’s Budget has been in “no way comparable” to what was seen after Liz Truss’s mini-Budget in 2022, experts have said.
Gilt yields – borrowing costs for the Government – have risen since Wednesday after Rachel Reeves announced extra borrowing in her maiden Budget.
The value of the pound also fell, though it has since rallied.
Market experts have said the volatility is “nothing like the scale” that occurred around the time of the mini-Budget.
Ten-year bonds went above 4.5 per cent on Thursday as markets digested the scale of Reeves’s extra borrowing, but have since fallen.
Although this is a similar level to in September 2022, after Liz Truss and her chancellor Kwasi Kwarteng announced a series of unfunded tax cuts, the rise at that time came from a far lower base.
“The level of bond market volatility is nothing like the scale which occurred around the Trussenomics mini-Budget in 2022. This time around gilt yields have edged up from 4 per cent, when the Labour Government came into power in July to around 4.5 per cent on Thursday but have since come down.
“During the Liz Truss short premiership, they spiked from 3 per cent to 4.5 per cent in just a matter of weeks,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Ms Streeter said the rise this time around was that investors in UK debt were “baulking” at the extra borrowing the Government is taking on.
At the Budget, Rachel Reeves changed the fiscal rules – which govern her tax and spending plans – to allow her to borrow more money for investment in infrastructure projects.
“Bond yields have been a bit more volatile, as institutions financing government borrowing keep a more cautious eye trained on where the enlarged investment budget will be spent,” said Ms Streeter.
Myron Jobson, senior personal finance analyst at interactive investor, said: “The market’s reaction to the Budget is in no way comparable to the seismic gyrations created by the mini-Budget which resulted in a painful spike in mortgage rates.
“The reaction is more a natural adjustment to the announcement of an uptick in government borrowing to bankroll spending projects, following a rule change which has unlocked over £50bn in additional capital investment. Financial market will be keeping a close eye on how cash from the bumper borrowing facility will be used.”
Laith Khalaf, head of investment analysis at AJ Bell said: “Of course, markets are especially sensitive to the effect chancellors can have on interest rates ever since Kwasi Kwarteng took to the despatch box, and with the ten-year gilt yield now climbing to levels seen in the wake of mini-Budget, it’s fair to ask whether Rachel Reeves’s maiden Budget could cause similar problems.
“The answer is probably, and hopefully, not. The scale and speed of rises in gilt yields has not been the same as it was in September 2022, giving markets time to adjust to lower prices.”
At the mini-Budget in 2022, then-chancellor Kwasi Kwarteng announced a cut in the basic rate of income tax, the abolition of the additional rate band for the highest earners, a reversal of the 1.25 per cent rise in national insurance, and a plan to scrap an upcoming increase in corporation tax.
The set of policies was not accompanied by a forecast by the Office for Budget Responsibility (OBR) – a body designed to provide independent economic forecasts and independent analysis of the public finances.
The pound fell sharply and borrowing costs on government bonds soared. This caused chaos for pension funds as the complicated way they borrowed money worked on the assumption that bond rates would always be steady and relatively low. Most noticeably for the average household, mortgage lenders started to pull their best rates, as Swaps – which set fixed pricing – began to climb.
Economists think that Reeves’s Budget had a small impact on inflation, which experts have said will mean mortgage rates will not fall as rapidly as they were otherwise expected to, and there may be some increases.