Markets have taken a step back from their initially positive response to the Budget as investors take in the gloomy growth downgrades for the later years of the UK parliament.
There was general relief immediately after the statement that the Chancellor Rachel Reeves will end up with a £22bn fiscal headroom.
Sterling climbed to $1.33 against the dollar and 10-year bond yields fell to 4.43%.
However, today the pound retreated to $1.32 and gilt yields rose to 4.47%.
Prem Raja, head of trading floor at Currencies 4 You, said the markets are not so positive now they have digested the Budget.
He added: “Chancellor Reeves’ Budget initially sparked a relief rally in the City, but less than 24 hours later, that optimism is evaporating. Yesterday, markets cheered the surprise £22bn fiscal headroom – far exceeding the expected £9bn – which reassured investors that the government wouldn’t need to borrow recklessly.
“Thursday morning has brought a sober reality check. Why the reversal? Investors are looking past the headline figures at the OBR’s gloomy growth downgrades for the later years of the parliament.
“The market now realises that Reeves’ ‘stability’ relies on painful tax hikes delayed until 2028. While she avoided a market meltdown, the retreating pound suggests the City is sceptical that this low-growth plan is sustainable long-term.”
Tony Redondo, Founder at Cosmos Currency Exchange, said concerns are mounting.
“The Budget’s £70bn tax increase across two budgets pushes the tax burden to a post-war peak of 38.3% of GDP, more than any modern Chancellor. Concerns are mounting that these measures could push the sluggish economy into outright recession once they impact the real economy.”
The FTSE 100 which rose strongly yesterday was trading at 17 points lower at 9,674.82 at mid-day.
Nigel Green, chief executive of financial adviser deVere group,forecasts a Bank of England rate cut in December, followed by three further reductions next year, as Britain’s economic trajectory shifts more decisively toward slower growth and easing price pressures.
He says the Budget removed the final major uncertainty preventing the Bank of England from restarting its easing cycle.
“While the Chancellor stepped back from the more aggressive tax rises that had been discussed earlier, the overall package is the highest tax burden on record, lower near-term inflation, and weaker already-fragile growth momentum.
“We now expect the Bank of England to cut rates in December and then follow with three more reductions in 2025.
“The data now supports it, the fiscal picture allows it, and the growth outlook increasingly demands it.”
