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UK borrowing costs at highest for a year after Budget Investors reaction to Budget 'very different' to Truss
(about 16 hours later)
The cost of UK government borrowing has risen to its highest level for more than a year in the wake of Wednesday’s Budget. Rachel Reeves' Budget is "very, very different" to the Liz Truss mini-Budget of two years ago, according to a senior government minister.
The interest rate – the so-called yield – the government has to pay lenders when it borrows money from them over a 10-year period, climbed above 4.5% on Thursday before falling back. Chief Secretary to the Treasury Darren Jones's comments were designed to reassure markets following a rise in the cost of government borrowing in the wake of Wednesday's Budget.
Yields have been driven higher after the chancellor announced a sharp rise in government borrowing to finance spending projects, sparking expectations that interest rates will fall more slowly. The amount the government has to pay lenders has risen after the chancellor announced a big increase in government borrowing to finance spending projects, sparking fears it may need to raise even more money.
Jones told the BBC it had put in place new rules to make sure spending on public services was paid for by tax receipts "not borrowing every single month".
He said investors always reacted to Budgets because they "present a whole load of new information".
"We've all got a a bit of anxiety from what happened when Liz Truss was in government.
"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 – the so-called yield – the government has to pay lenders when it borrows money from them over a 10-year period, climbed to its highest level for a year on Thursday before falling back on Friday.
This matters because not only does it mean the government will have to pay more to borrow, but bond yields are also used as a guide for setting the rates on everyday loans and mortgages.This matters because not only does it mean the government will have to pay more to borrow, but bond yields are also used as a guide for setting the rates on everyday loans and mortgages.
The jump in how much the government has to pay to borrow is a signal that investors regard lending it money as being a bigger risk.The jump in how much the government has to pay to borrow is a signal that investors regard lending it money as being a bigger risk.
The yield on 10-year government bonds hit 4.53% mid-Thursday afternoon before falling back to 4.46%. On Thursday, Sir Keir Starmer's spokesperson said there had been reaction from "bodies such as the IMF welcoming [the government's] approach".
But following the rise Chancellor Rachel Reeves told Bloomberg TV the government's "number one commitment" was "economic and fiscal stability".
“We have now put our public finances on a stable and a solid trajectory,” she said.
Earlier, Sir Keir Starmer's spokesperson said there had been reaction from "bodies such as the IMF welcoming [the government's] approach".
The BBC's economics editor Faisal Islam says so far the rise in borrowing costs is a natural market adjustment rather than the panicked reaction which followed Liz Truss's mini-Budget two years ago.
There has also been a wider rise in borrowing costs over the past month, but that has been a global movement led by the US, he adds.There has also been a wider rise in borrowing costs over the past month, but that has been a global movement led by the US, he adds.
In the Budget, Reeves announced nearly £70bn of extra spending a year, funded by tax increases for business and extra borrowing.In the Budget, Reeves announced nearly £70bn of extra spending a year, funded by tax increases for business and extra borrowing.
Analysts said the upwards movement in bond yields was an indication that the markets weren't happy about the increase in government spending. Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the investor reaction had also been sparked by an expecation that interest rate cuts would now be scaled back, given forecasts that the Budget could push up inflation over the next two years.
Kathleen Brooks, an analyst at trading firm XTB, said the movement indicated that the Budget "has not been well received" by markets.
"This is another sign that the chancellor overestimated the market's desire to absorb more sovereign debt issuance from the UK," she said.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said expectations for interest rate cuts had been scaled back, given forecasts that the Budget could push up inflation over the next two years.
"Financial markets are now not expecting rates to fall below 4% until 2026," she said."Financial markets are now not expecting rates to fall below 4% until 2026," she said.
"This has been reflected in the spike in UK gilt yields to some extent, but given that sterling has remained lower against the dollar, it also indicates that there is a growing nervousness about the way Labour is steering the economy."
She said bond yields were 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".