Investor Response to Budget Deemed ‘Very Different’ from Truss Era

A senior government minister has stated that Rachel Reeves’ Budget is “very, very different” from the Liz Truss mini-Budget presented two years prior. These remarks, made by Chief Secretary to the Treasury Darren Jones, aimed to calm financial markets after an increase in government borrowing costs and a depreciation of the pound occurred following Wednesday’s Budget. The government’s repayment obligations to lenders have increased subsequent to the chancellor’s announcement of a substantial rise in government borrowing intended to fund various spending initiatives, leading to concerns about the potential need for further fundraising. Speaking to the BBC, Jones stated that new regulations had been implemented to ensure that expenditures on public services are covered by tax revenues, “not borrowing every single month.” He explained that investors consistently respond to Budgets because these events “present a whole load of new information.” He added, “We’ve all got a bit of anxiety from what happened when Liz Truss was in government.” Jones further elaborated, “We’ve got strong fiscal rules in place so that day-to-day spending on public services is paid for by tax receipts, not borrowing every single month, which is what the last government did, and we’ve got a strong investment rule that means that while we’re investing in the country, debt is falling as a share of the size of the economy.” The interest rate, or yield, that the government must pay to lenders for borrowing funds over a 10-year term, for instance, surpassed 4.52% on Thursday, marking its highest point in a year, before decreasing to 4.45% by Friday. These 10-year bonds serve as the standard indicator for the government’s borrowing costs. Yields on two-year bonds, which are typically more responsive to market announcements, exhibited comparable fluctuations. UK government bonds, also known as gilts, are considered among the most secure investment options due to the perceived low probability of the government defaulting on repayments. An increase in the yield indicates that investors perceive a higher risk in lending money to the government. This is significant because it not only implies increased borrowing costs for the government but also because bond yields influence the setting of rates for common loans and mortgages. David Hollingworth, from mortgage broker L&C, noted that the secondary impacts of the Reeves Budget were already evident in the market. Initially, some smaller lenders ceased offering certain mortgage products, a trend subsequently adopted by larger, mainstream providers, with both Skipton and Coventry building societies declaring increases to their fixed rates, effective early next week. Mr. Hollingsworth commented, “It’s confusing times for mortgage borrowers when expectation is for a base rate cut [by the Bank of England] next week but fixed rates look set to rise.” He added that if market rates persist at their present levels, it appears “inevitable” that additional lenders will need to reassess their rates. He advised, “Borrowers currently considering a fixed-rate option should move quickly to secure a deal as we’re seeing some rates withdraw with very little notice.” Nevertheless, it is crucial to contextualize these recent market fluctuations. The initial shifts observed in the bond and currency markets were approximately one-tenth the magnitude of those that followed the mini-Budget, which was presented by Kwasi Kwarteng during Liz Truss’s premiership. For instance, the pound depreciated by 0.8% against the dollar, reaching a two-month low, but by 17:00 GMT on Friday, it had stabilized to approximately 0.5% lower. In contrast, subsequent to the mini-Budget, the pound dropped by 8% against the dollar, hitting an unprecedented low. Furthermore, a broader increase in borrowing costs has occurred over the last month, though this represents a global trend primarily driven by the US. On Friday, Reeves stated her refusal to comment on market movements, explaining, “because markets move all the time.” She did, however, mention that the IMF had provided the Budget with a “clean bill of health” and that the independent official forecaster, the Office for Budget Responsibility, had confirmed its adherence to fiscal rules. Within the Budget, Reeves declared nearly £70 billion in additional annual spending, to be financed through increased taxes on businesses and further borrowing. Susannah Streeter, who serves as head of money and markets at Hargreaves Lansdown, indicated that investor response was also influenced by an anticipation that interest rate reductions would now be less significant, considering projections that the Budget might contribute to higher inflation over the coming two years. She noted, “Financial markets are now not expecting rates to fall below 4% until 2026.”