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Karen Hoggan, a Business Reporter, discusses the recent fluctuations in government borrowing costs. The day after the Chancellor’s emotional display in the Commons, the yield on UK 10-year bonds fell to 4.52% from the previous day’s close of 4.61%. This shift was influenced by the Prime Minister’s statement that he worked closely with Rachel Reeves, causing the pound to rise to $1.3668, although it has not fully recovered.
Financial markets appear to be supporting the Chancellor, with concerns that a potential departure could weaken government financial control. Will Walker Arnott, head of private clients at Charles Stanley, noted that markets fear a lack of fiscal discipline if the Chancellor were to leave, resulting in larger deficits. Mohammed El-Erian from Allianz warned that the markets are likely to remain uneasy with a risk premium introduced, making it difficult to restore stability.
The impact of bond yield movements extends to the mortgage market, potentially affecting mortgage deals with higher yields leading to increased costs. Currently, mortgage rates have remained relatively stable, with lenders making minor reductions to attract customers. The recent emotional display and policy reversal by Chancellor Rachel Reeves during Prime Minister’s Questions have also influenced the market’s sentiment, with concerns about potential financial repercussions of the welfare reforms U-turn.
Chancellor Reeves has emphasized her non-negotiable fiscal rules, emphasizing the need to cover day-to-day spending with government revenue and only borrowing for investments. However, the unexpected changes in the welfare reforms have created challenges for fiscal planning, forcing tough decisions on tax increases, spending cuts, or issuing more government debt. Despite the uncertainty, investors value political stability, with the backing of Prime Minister Sir Kier Starmer providing some reassurance to the market regarding the Chancellor’s credibility and commitment to fiscal discipline
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