Despite the initial market volatility caused by the leaked Office for Budget Responsibility (OBR) forecast, published by mistake ahead of chancellor Rachel Reeves’s speech today, the Gilt market reaction to the UK Budget was ‘subdued’.
Before the chancellor even had a chance to address parliament and provide an update on the government’s financial plans for the year ahead, a key document from the OBR was unexpectedly published on the office’s website, revealing a £26bn (€29.6bn) tax rise.
Ten-year Gilt yields briefly fell from 4.50% to 4.42% when the document was leaked, but the fluctuations quickly calmed down. By the end of the Budget statement, the yields had settled at around 4.47%.
Oliver Faizallah, head of fixed income research at Charles Stanley, said: “Markets have taken the news in their stride for now. Following the OBR leak, Gilts moved only a couple of basis points higher and have come back to flat, indicating investors see the revisions as manageable for now.
“The focus will remain on whether higher borrowing pressures on Gilt supply complicate the path to rate cuts.”
Reeves confirmed that measures announced, including changes to salary sacrifice contributions, will double headroom against the stability rule to £21.7bn, with borrowing expected to fall in every year of the forecast.
The OBR expects average GDP growth of 1.5% over the next five years, 0.3 percentage points slower than in March, alongside higher borrowing.
The OBR added that the Budget delivers a front-loaded £9bn increase in spending and a back-loaded £26bn rise in taxes. While this doubles the current surplus to £22bn by 2029-30, it also leaves debt higher than projected in March.
Aqib Merchant, fiduciary manager at Russell Investments, said the market had been well prepared for tax rises.
He said: “The measures announced were largely expected, and the bigger market driver was the OBR’s weaker growth outlook. Softer growth expectations may even give the Bank of England a little more room to bring rates down sooner, provided inflation remains contained.
“Gilt yields initially moved when the OBR numbers came out early, but have since settled back. Ten and 20-year yields are now slightly lower as markets digest the full package.”
Overall, the market reaction was “pretty subdued”, according to Matt Tickle, chief investment officer at Barnett Waddingham.
“Some front-loading of welfare spending and longer-term tax rises might generate headlines for a few weeks, but none of the fiscal changes look substantial enough to impact the Gilt or sterling markets,” he noted.
He said that while there has not been a negative shock, equally, the chancellor’s announcements are unlikely to bolster market sentiment.
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