Moody's warned that the budget poses new challenges to Britain's public finances.

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British Prime Minister Rachel Reeves plans to borrow more, posing additional challenges to recovering public finances, ratings agency Moodys warned on Friday. This is because the gold market remained stable after two days of chaos.

In its assessment of the Labor government's inaugural budget, Moodys said Reeves was still complying with new fiscal rules, leaving only limited buffers to absorb unexpected shocks.

The increased borrowing in the budget could lead to higher debt issuance costs, the note to investors added.

Moody's verdict comes amid a return to relative calm following a sell-off triggered by the scale of debt issuance that pushed long-term borrowing costs to the highest level this year.

The 10-year yield was little changed Friday at 4.44%, below Thursday's high of 4.53%. The yield rose from 4.21% during Reeves' budget speech on Wednesday as investors grew concerned about the planned volume of gold bond issuance.

Sterling rose 0.3% to $1.294 against the greenback on Friday, clawing back most of Thursday's losses.

Rival S&P Global said the fiscal rule changes sent a mixed message and it was unclear whether the government would be able to stick to them. S&P said the rules themselves could be subject to further changes, adding that the Budget did not change its view that strengthening public finances was a difficult task.

Reeves announced a budget on Wednesday that would raise taxes by more than $40 billion while increasing borrowing to fund everyday spending and increased government investment.

Moodys said increased borrowing, partly supported by new debt measures under the fiscal framework, would pose additional challenges to the already difficult fiscal consolidation outlook.

In response to the post-budget sell-off, Reeves said Thursday that the government's top commitment is economic and fiscal stability, insisting in a Bloomberg TV interview that he has implemented strong fiscal rules and that there will be significant fiscal stability. Fiscal consolidation.

Moodys also warned that the budget would do little to improve UK economic growth in the future.

We expect growth from the baseline to slow between 2025-27 and remain at an average of 1.7% until structural constraints, including labor market inactivity that has worsened since the pandemic and persistent sluggish productivity growth, continue to be addressed, it said.

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Moody's said higher borrowing levels could raise the cost of issuing new bonds, noting that bond markets were already sensitive to UK policy missteps following the gold market turmoil following then-Prime Minister Kwasi Kwarteng's so-called mini-budget. added.

Moody's said the UK's fiscal policy effectiveness has weakened in recent years, particularly after the 2016 Brexit vote, noting that frequent changes to the UK's fiscal rules have undermined its effectiveness as a reliable policy basis.

The agency added that Reev's decision to move to a more stringent three-year rolling timeline to meet the revised rules demonstrates its commitment to adhering to the new regime and supports its credibility.

In a statement Friday, Reeves said he had laid out a clear economic plan with strong fiscal rules that would reduce debt, balance the current budget within three years and responsibly provide the investments the country needs to support growth.

The market reaction has been driven by interest rate swaps, with brokers saying the decline in UK mortgage rates is likely to slow in recent months.

Two-year interest rate swaps, which are closely watched due to the proliferation of two-year fixed-rate mortgages, rose to 4.47% from 4.3% before the budget and below 4% in mid-September. The 5-year maturity swap also increased, reaching 4.28%.

Simon Gammon, managing partner at Knight Frank Finance, said further falls in mortgage rates would be on hold for now and some lenders may raise rates in the coming weeks to defend margins.

That said, Gammon said this is unlikely to make much of a difference to the trajectory of mortgage rates, at least not if volatility in the bond market is curbed now.

Additional reporting by Robert Wright, Ian Smith and Akila Quinio

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