UK policy mix challenged by the market

A surge in long-term government bonds along with a slide in the pound has been a sign of market nervousness as markets are concerned about persistent inflation and budget sustainability. Following the Budget announcement, we expected borrowing costs for the UK debt to rise. While new fiscal targets visually improve the UK’s fiscal situation, the reality is different. T he General Government Gross Debt, which is more widely used in other countries , most notable in the European Union, is expected to increase from 100% of GDP in 2023-24 to 106% in 2029-30. Market pricing is adjusting quickly with more rate cuts expected as weaker demand will probably imply more support from the BoE. We have expected four rate cuts this year, and the market is now converging to our BoE call (with possible front-loading) . While GDP growth and inflation should be somewhat higher this year due to the positive effect of higher government spending, tax increases (particularly a rise in National Insurance Contributions from this April onward) will undermine private sector activity in the coming years. In our view, r educed private consumption and investment from 2026 onwards and an emergence of economic slack will necessitate looser monetary policy in the period ahead. As such, this year’s four rate cuts will be frontloaded and likely necessary to calm the market nervousness. On the fiscal side, the chancellor may be pushed to change somewhat her fiscal plans to reassure markets, more likely opting for public spending cuts than unpopular tax hikes .