Budget investors' reactions to Liz Truss are 'very different'

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Rachel Reeves' budget is “very, very different” to the Liz Truss mini-budget from two years ago, according to a senior government minister.

Finance Minister Darren Jones' comments were designed to reassure markets following rising government borrowing costs and a fall in the pound following Wednesday's Budget.

The amount the government must pay to lenders has risen after the Prime Minister announced a significant increase in government borrowing to finance spending projects, sparking concerns it may have to raise more money.

Jones told the BBC the new rules had been put in place to ensure spending on public services was paid for with tax receipts “rather than monthly loans”.

He said investors always react to the budget because it “provides a lot of new information.”

“We’ve all been a bit disturbed by what happened when Liz Truss was in government.

“We have strong fiscal rules in place to ensure that day-to-day spending on public services is paid for with tax receipts rather than borrowing every month, which is what the last government did. And we have strong investment, which means we have a strong commitment to the country. This means that while you are investing, your debt is decreasing relative to the size of the economy.”

For example, the so-called yield that the government must pay to lenders over 10 years to borrow money from lenders rose slightly above 4.52% on Thursday, its highest level in a year, before falling back to 4.45%. % on Friday.

The 10-year Treasury bond is considered a benchmark measure of how much the government must pay to borrow.

Yields on short-term two-year bonds, which are generally more sensitive to market announcements, also saw similar movements.

UK government bonds or gold bonds are considered one of the safest forms of investment because it is thought that there is little chance that the government will fail to repay its money.

When yields rise, it is a sign that investors view lending money to the government as riskier.

This is important not only because it means the government has to pay more to borrow, but also because bond yields are also used as a guide to setting everyday lending and mortgage rates.

David Hollingworth of mortgage broker L&C said the knock-on effects of the Reeves Budget were already being felt in the market.

Initially some smaller lenders withdrew their mortgages, but larger mainstream lenders followed suit, with Skipton and Coventry housebuilders both announcing fixed rate increases from early next week.

It's a confusing time for mortgage borrowers hoping for a rate cut. [by the Bank of England] Fixed rates are expected to rise next week, Mr Hollingsworth said.

But if market interest rates remain where they are, it seems “inevitable” that more lenders will have to reconsider their rates, he said.

“Borrowers who are currently considering fixed rate options are seeing some rates being drawn down without notice, so they need to move quickly to secure a deal.

However, it is important to put the latest market trends in context.

Initial movements in bond and currency markets were about a tenth of the size seen after the mini-budget delivered by Kwasi Kwarteng while Liz Truss was prime minister.

For example, the pound fell 0.8% against the dollar, hitting a two-month low, but remained down about 0.5% at 17:00 GMT on Friday.

In comparison, in the aftermath of the small budget, the pound fell 8% against the dollar, hitting an all-time low.

Borrowing costs have increased significantly over the past month, but this has been a global movement, led by the United States.

On Friday, Reeves said he would not comment on market movements because “markets always move.”

But she said the IMF had given the budget a clean slate and the Office for Budget Responsibility, an independent official forecaster, had met fiscal rules.

In the budget, Reeves announced about $70 billion in additional spending per year, funded through increased taxes on businesses and additional borrowing.

Susannah Streeter, head of funds and markets at Hargreaves Lansdown, said the investor reaction had been sparked by expectations that the budget would scale back interest rate cuts, given the prospect of higher inflation over the next two years.

“Financial markets currently expect interest rates not to fall below 4% until 2026,” he said.

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