UK budget reaffirms rate cut bets

UK pension funds

Since September 2022, UK budgets have unsettled investors impacted by former prime minister Liz Truss’ underfunded tax and spending plans

Investors in UK assets reaffirmed a view that the economy was heading for interest rate reductions in the coming months as finance minister Jeremy Hunt resisted budget giveaways on Wednesday that could have triggered concerns of inflationary over-spending.

Hunt cut national insurance contributions by 2 pence in the pound but stuck to a fiscally cautious mandate that eased anxiety about Britain’s $3 trillion debt burden, boosted consumer stocks and helped the pound stay strong against major peers.

Since September 2022, UK budgets have unsettled investors impacted by former prime minister Liz Truss’ underfunded tax and spending plans.

It is seemingly still taking some time to rebuild that trust, added Dean Turner, an economist at UBS. But I think this government and this chancellor have definitely learned that going down the Liz Truss route is not for them.

Hunt was under pressure to reduce taxes more deeply ahead of a national election and with his Conservative Party trailing the opposition Labour Party by a wide margin, investors had feared a budget that undermined the Bank of England’s battle against inflation.

There was a temptation to deliver 3 or even 4 pence cuts on NI and. The risk to inflation would have been higher, said Schroders senior European economist Azad Zangana, noting that both overseas and UK investors had been nervous ahead of the budget.

Sterling held near Tuesday’s one-month highs against the dollar and London’s FTSE stock index marginally outpaced its European peers.

In Britain’s government bond market, which affects the cost of borrowing for corporates and mortgages and was at the centre of the 2022’s post-mini budget rout, 10-year gilt yields hit their lowest level in around three weeks. That move also came as US Fed chief Jerome Powell testified to Congress.

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