Financial markets took the Budget in their stride, with government borrowing costs remaining steady after Chancellor John Healey delivered his first fiscal statement.
Gilt yields - the interest rate the government pays on new debt - were largely unchanged after the Budget. That was despite the Office for Budget Responsibility warning that higher inflation would mean government borrowing costs would be £14 billion a year higher this parliament.
Growth Forecasts Cut
The watchdog has cut its growth forecasts for the UK for next year because of the expected ongoing fallout from the Middle East war. The Chancellor also warned that the government's fiscal headroom would be slashed from £24 billion to £15 billion by the end of the decade.
Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “Sterling and gilts have taken it in their stride, but with only a thin buffer, both remain exposed to weaker growth or a further rise in global borrowing costs. The can has been kicked, but the road is getting shorter.”
Fiscal Discipline Emphasised
Kit Rees, investment strategist at Quilter, said: “John Healey has delivered his inaugural budget and, judging by the tempered reaction in sterling and gilts, his statement has done its job to placate markets looking for evidence of fiscal credibility.”
Rees added that Healey made fiscal discipline the primary feature of his speech, stating that this will underpin all the decisions he takes as Chancellor, in a bid to calm markets ahead of potential options for higher spending down the line.
“Still, despite this resoluteness from the Treasury, the UK faces a tricky backdrop. The Iran war and ensuing rise in oil prices have stoked inflationary pressures, with rising bets that the Bank of England will raise interest rates pushing gilt yields higher,” Rees said.
Market Reaction
Matthew Amis, investment director at financial firm Aberdeen, said: “The gilt market wanted dull and they got exactly that. With oil and gas prices this high and with one eye on France, a dull Budget is what was needed.”
“All of the major obstacles presented to Chancellor Healey were avoided, as such gilts yields are slightly out-performing,” Amis added.
