UK finance minister delivers spring statement, gilt yields fall
LONDON (Reuters) -British finance minister Rachel Reeves on Wednesday announced cuts to spending plans and lower economic growth forecasts in her latest fiscal statement to parliament.
Britain’s government is set to borrow 47.6 billion pounds ($61.4 billion) more between now and the end of the decade than expected five months ago, according to forecasts from the country’s fiscal watchdog published on Wednesday.
Still, government bond yields fell after the UK’s Debt Management Office said it would issue fewer bonds than expected in 2025/26, cooling market fears about another wave of supply.
Two-year gilt yields were last down around 4 basis points on the day at 4.26%, while 10-year yields were 2 bps lower at 4.73%.
Sterling was down 0.5% at $1.2877, having traded at $1.2900 just before Reeves started speaking, it was also softer on the euro 83.65 pence to the common currency.
London’s blue-chip FTSE-100 stock index was last up 0.1%, largely where it was before the announcement.
COMMENTS:
KIT JUCKES, HEAD OF FX STRATEGY, SOCIETE GENERALE, LONDON:
“I don’t think there was anything very surprising in it. That they’ve reduced the amount of long end issuance – breathe a sigh of relief that some common sense has been applied – but surely most people thought they’d be some common sense.
“The pound has weakened a bit more against the dollar, but that is more to do with the dollar and U.S. economic data .”
SHAMIL GOHIL, FIXED INCOME PORTFOLIO MANAGER, FIDELITY INTERNATIONAL, LONDON:
"The Chancellor has replenished the fiscal headroom back to 9.9 billion pounds (spending rule), which may provide some relief in the short term, but this is a temporary fix, kicking the can down the road. Longer term, budgetary challenges remain as higher interest rates and weaker growth persist."
"The 10 billion pounds headroom is arguably not enough headroom compared to a planned ~1.5trn of spending and uncertainties ahead. The historical average has been closer to 30 billion pounds but recent governments have run it tighter. A 20 billion pound number would have been more constructive for Gilts. Ultimately, the fiscal headroom is how the market quantifies and judges the Chancellor’s credibility. Gilts probably remain in no man’s land until the Autumn budget as we will likely to see some fiscal slippage and buffer erosion from now until then."
JANE FOLEY, HEAD OF FX STRATEGY, RABOBANK, LONDON:
"In sterling, there wasn’t a huge market reaction and I think it reflects the deliberate effort by the government to front-load most of the news. So, it was no shock to the market that growth was cut in half in 2025 to 1%. In fact, that only brings us in line with the surveys of economists.
"So, no surprises there. Perhaps a little bit of good news, bearing in mind we’re accustomed to seeing a lot of bad news from the UK recently, so perhaps a little bit of good news insofar as the outward revision for GDP from 2026 onwards.
"But certainly no big surprises in this budget. There was no anticipation that there would be tax hikes this spring, and no tax hikes came. Whilst there were significant welfare changes and there was news about planning, etc., all of that had been out and delivered by Reeves well before today’s statement. So there was nothing hugely surprising delivered today."
RORY MCPHERSON, CHIEF INVESTMENT OFFICER, WREN STERLING:
"The spring statement is what markets wanted -- pretty boring and uneventful on the back of what were probably quite big events in previous iterations."
"It is largely a non-event."
"We’re pretty positive on UK assets. We have an overweight in equities in the UK, and we are constructive on short-dated UK bonds. We’re cautious of longer dated bonds because of all the debt issuance, that will pressure gilt yields."
PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:
"It’s clear that without corrective action from the government the OBR (Office for Budget Responsibility) would have concluded that the fiscal rules have been missed by 4 billion pounds. As widely trailed, the Chancellor has tightened expenditure in various areas, particularity welfare."
"We’re now on course to meet the fiscal rules, but that is subject to economic events over the period between now and the budget, and if things go badly with the economy and the public finances, then the Chancellor will be back to square one, perhaps with a need to tighten spending again or perhaps tax increases or even a combination of both. But it’s pretty clear that credibility is absolutely critical for the government in being on track to meet the fiscal rules."
VASILEIOS GKIONAKIS, SENIOR ECONOMIST AND STRATEGIST, AVIVA INVESTORS, LONDON:
"Reeves’s aims were to really double down on discipline as far as the fiscal rules are concerned and restore the headroom. She has done both."
"Of course, whether that remains to be the case… in the autumn budget, it remains to be seen."
"There is a risk that she will have to reinstate part of the headroom in the autumn and to the extent that she has delivered welfare and departmental spending cuts, that increases the likelihood that she will have to go down the road of increasing taxes."
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