Update 1 - UK market reacts calmly to Healy's first budget proposal

Additional quote, supplemental background information

Samuel Indyk/Johann M Cherian

Reuters LONDON, October 28 - On Wednesday, the UK market reacted calmly to Chancellor John Healey’s first budget, with the government’s commitment to sticking to borrowing rules providing reassurance to the market.

Recently, global borrowing costs have reached highs not seen for several years, and financial markets have been waiting for the UK’s new chancellor to offer assurances about adhering to fiscal discipline.

Healey said the fiscal space (link)—that is, the government’s extra room for spending or tax cuts under its own fiscal rules—was 1.5 billion pounds ($19.93 billion), in line with a Reuters poll’s expectations, but down from 2.36 billion pounds in March.

As bond prices rose, the UK 10-year government bond yield GB10YT=RR fell by 3 basis points on the day, to about 5.31%; the 30-year government bond yield GB30YT=RR fell by 4.5 basis points, to about 5.70%.

“The bond market called it a ‘very dull’ budget—the long-dated bond yields dipped a few basis points while other maturities were broadly unchanged. So, nothing has significantly altered the UK’s fiscal situation,” said XTB Head of Research Kathleen Brooks.

“Even though the headline level of borrowing is higher, it hasn’t made any difference to the market and investors aren’t worried because the government is taking advantage of more optimistic forecasts for economic growth,” she said.

This low-key budget may be good news for investors in UK assets, who still remember when former Prime Minister Liz Truss’s 2022 ‘mini-budget’ sparked a bond market meltdown with unfunded tax cuts.

“I think the core of the whole budget today is genuinely to avoid a repeat of the ‘Liz Truss moment,’” said Mike Bell, Head of Market Strategy at BlueBay Asset Management.

“He(Healey) did pretty well—fiscal space matched expectations almost exactly. This gives UK gilt investors no reason to panic in the near term, which of course was the aim today.”

The pound slipped 0.1% against the dollar GBP= to $1.3295, having earlier touched a one-and-a-half week low. Against the euro EURGBP= the pound dropped 0.2%, to 0.8375 pounds.

The benchmark FTSE 100 index .FTSE rose 0.3%, broadly in line with other major European stock markets. The FTSE 250 index .FTMC, with a higher proportion of domestic earnings, also rose 0.3%.

The UK’s biggest lenders welcomed a smaller-than-expected increase in profit tax (link). The bank tax is being raised by increasing the surcharge on profits above a set threshold from 3% to 6%, partly reversing the policy from three years ago when then-Conservative Prime Minister Rishi Sunak cut the rate from 8%.

Lloyds Banking Group LLOY.L, Barclays BARC.L and Royal Bank of Scotland NWG.L all climbed between 3.3% and 3.6%.

“This extra surcharge will only exert mild and temporary pressure on profits, rather than fundamentally altering the sector’s investment case,” said Shore Capital equity research analyst Gary Greenwood.

(1 US dollar = 0.7527 pounds)

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