The UK's financial landscape is shifting! Following a pledge to stabilize public finances, the UK government's borrowing costs have decreased, while the value of the pound has weakened. This might seem complex, but let's break it down.
On Tuesday, British government bonds, known as gilts, showed the best performance among major bonds. Investors were eager to purchase these assets after Rachel Reeves, the Chancellor, reiterated her 'iron-clad' commitment to fiscal rules during a pre-budget speech on November 26th.
- So, what does this mean in numbers? The yield on two-year gilts dropped by 0.06 percentage points to 3.78%, nearing a 13-month low. The borrowing cost on 10-year bonds, which reflect the government's debt servicing costs, fell by 0.07 points to 4.42%. Remember, when bond prices rise, yields fall.
Reeves emphasized that she wouldn't resort to 'accounting tricks' to meet fiscal targets. She addressed critics who suggested loosening budget rules that restrict spending not covered by tax revenues by the decade's end.
"Markets understand my unwavering commitment to fiscal rules," Reeves stated. "Some suggest we can bypass these rules by reclassifying areas like defense or education. But no accounting trick can change the fundamental fact that government debt is sold on financial markets. There is a limit to what banks, hedge funds, and pension funds are willing to pay for our debt."
- Here's where it gets controversial... Gilts performed well in October after Reeves hinted at increasing her fiscal buffer, lowering inflation, and raising taxes to cover a gap of approximately £20 billion to £30 billion.
The Chancellor also promised to help lower inflation, paving the way for the Bank of England to potentially cut interest rates.
- And this is the part most people miss... Expectations of a weaker monetary policy have caused the pound to fall this week. Sterling lost another 0.6% against the dollar, reaching $1.31 – the lowest since April. It also fell by 0.35% against the euro to €1.14 – the weakest since May 2024.
Matthew Amis, an investment director at Aberdeen Investments, noted that Reeves provided “all the right comforting words” to the bond market before the budget.
What do you think? Do you agree with the government's approach, or do you have a different perspective on how the UK should manage its finances? Share your thoughts in the comments below! If you'd like to dive deeper, join Fraser Nelson, Mehreen Khan, Steven Swinford, and Patrick Maguire on November 27th as they analyze the Chancellor's budget announcement.
