Sterling firms as Reeves claims debt discipline lowered UK borrowing costs; gilts rally after budget
The pound edged higher and UK bond yields eased after Chancellor Rachel Reeves said a tighter grip on debt was helping to reduce borrowing costs, even as the fiscal watchdog cautioned the budget’s measures won’t materially change the outlook.
Markets reward fiscal tone—for now
Investors offered a modest vote of confidence to the new budget stance. Ten-year gilt yields fell to around 4.42% late Wednesday, while sterling ticked up as traders dialed back the risk of a near-term “fiscal premium” in UK assets. The move came amid steady global risk sentiment and a benign rates backdrop, keeping FX volatility contained.
In rates, the gilt curve bull-flattened as buyers stepped in at the long end, suggesting investors saw no immediate threat from deficit slippage or large surprise issuance. For FX, a narrower UK risk premium supports the pound at the margin, though BoE rate expectations and incoming inflation data remain the primary drivers.
Reeves defends fiscal stance
Chancellor Rachel Reeves argued that a tighter approach to debt has already lowered the government’s cost of funding and pushed back on claims that higher taxes are being used to bankroll welfare spending. She acknowledged the strain on the public finances but framed the budget as a credibility-first exercise aimed at stabilizing the outlook and crowding in investment.
OBR pours cold water on growth impact
The Office for Budget Responsibility said none of the announced measures “have a material effect” on its forecast—positive or negative—signaling limited macro impulse from the budget. The OBR also underscored that both taxes and spending are higher in this plan, with the tax burden set to climb above post-war highs in the years ahead, a reminder that fiscal space remains constrained.
From a market perspective, that combination—policy continuity, no large surprises, and an emphasis on debt control—can suppress volatility in gilts and the pound, even if it does little to accelerate growth. The absence of “bond vigilantes” this week hints at a tentative credibility dividend, but sustaining it will hinge on the delivery of spending controls and the path of nominal growth.
FX and rates outlook
– For GBP, a calmer fiscal narrative reduces tail risks and supports dips, but relative rate differentials with the US and euro area, plus domestic data on wages and services inflation, should dominate medium-term direction.
– In gilts, the near-term bias is for stable-to-lower yields if global rates remain capped and the BoE approaches an easing cycle; any upside surprise in inflation or wider-than-expected issuance could reverse part of the rally.
Key points
- Pound rises and UK 10-year gilt yields ease to about 4.42% after the budget.
- Reeves says tighter debt control is helping lower borrowing costs; rejects claims taxes are rising to fund welfare.
- OBR: Budget measures do not materially change the macro forecast; both taxes and spending are higher.
- Market takeaway: Reduced risk premium supports GBP and gilts, but BoE path and inflation data remain decisive.
- Fiscal credibility now must be earned through execution to preserve the post-budget rally.
What this means for traders
With fiscal risks contained for now, sterling’s near-term bias is steadier, and gilt duration finds support on dips. But the OBR’s message—limited growth uplift and a heavier tax load—tempers the broader risk rally narrative. For FX desks, the focus returns to BoE communication, services CPI and wage prints; for rates desks, supply dynamics and global yields remain pivotal.
FAQ
How did UK markets react to the budget?
Sterling firmed and gilts rallied, with 10-year yields slipping to around 4.42% late Wednesday. The price action suggests investors did not see a renewed fiscal risk premium in the budget.
What did Chancellor Rachel Reeves say?
Reeves argued that controlling debt has already helped reduce borrowing costs. She also rejected the idea that tax increases are primarily funding welfare, while acknowledging the pressures on public finances.
What was the OBR’s assessment?
The Office for Budget Responsibility said the budget measures do not materially change its forecast. It noted both higher taxes and higher spending, with the tax burden expected to exceed post-war highs in coming years.
What are the implications for GBP/USD and EUR/GBP?
A calmer fiscal backdrop slightly supports the pound by reducing UK-specific risk. However, relative rate expectations, inflation data and BoE communication remain the main drivers for GBP crosses.
Could gilt yields fall further?
They could if global rates remain subdued and UK inflation cools toward target as the BoE moves closer to easing. Upside surprises in inflation or heavier-than-expected issuance would be downside risks to prices.
What should traders watch next?
Upcoming UK inflation and wage data, BoE commentary on the timing of rate cuts, and any adjustments to gilt issuance plans. Execution on spending controls will also matter for sustaining the credibility premium, BPayNews notes.
