UK markets stabilised on Friday, offering some reassurance to Rachel Reeves as investors, policy makers and business continued to absorb the scale and implications of her first budget.
Thursday saw an unusually large increase in the cost of UK government borrowing in response to the massive package of tax rises and increased borrowing.
Yields on the benchmark 10-year UK gilts – effectively the interest rate the government pays to borrow money – rose to their highest level this year, by 0.1% to 4.52%.
This was not a “Liz Truss” moment – Kwasi Kwarteng’s mini-budget triggered the largest single-day increase in more than two decades and pushed the pound down 8%.
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But the move was big enough to trigger an echo of that crisis which Ms Reeves’s opponents, some of whom were in Liz Truss’s government at the time, were quick to seize upon.
Interpreting money markets is a complex and inexact science – those who master it tend to make more money than journalists – but the hike appeared to be a response to two factors.
First, a small premium on the increased demand for UK debt implied by spending and borrowing plans larger than markets expected.
Second, the possibility that this vast budget might be inflationary, and therefore slow down the Bank of England’s plans to cut interest rates. Bond prices both inform and are informed by base rates, and if markets think the Bank is going to leave them higher for longer, that is reflected.
Officially the government does not comment on market movements, but an unexpected interview given by Reeves to financial specialists Bloomberg on Thursday afternoon, and the appearance of her number two Darren Jones on Friday’s morning round, spoke of a desire to soothe any tremors.
It may have worked. After an initial upwards spasm on Friday morning, gilt yields subsided, falling below their opening price on Thursday morning by lunchtime before ticking up in the afternoon in line with US Treasuries.
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They finished the week higher than before the budget, which could be interpreted as a small but last “risk premium” on the UK.
The pound meanwhile recovered the cent lost against the dollar since Reeves sat down in the Commons on Wednesday afternoon.
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What happens next will be determined in part by the Bank of England’s Monetary Policy Committee, which meets next Thursday. As well as a decision on interest rates, it will produce new forecasts for growth and inflation that may further shape investor sentiment.
It remains overwhelmingly likely that rates will be reduced by at least 0.25 percentage points to 4.75%, with a 90% chance of a similar Christmas cut at the following meeting in late December. That would be welcome news for consumers, never mind Reeves.