As Halloween looms the markets appeared to take fright at Chancellor Rachel Reeves’ first Budget as the cost of Government borrowing soared to the highest level in 12 months.
Bond markets, where the Treasury raises money, appeared to get scared by new inflation and borrowing projections from the Office of Budget Responsibility.
The OBR said the Chancellor will increase borrowing by £32 billion a year, meaning interest rates are likely to be 0.25 percentage points higher than they otherwise would have been in the coming years.
As a result, the yield on UK Government bonds, also known as gilts, rose by around 2% following the announcement of the Budget.
Average mortgage rates are expected to rise from an average of 3.7% to 4.5% over the next three years, slightly above previous projections, according to the OBR.
Following Ms Reeves announcement, political site Gobal Guido shared a graph on X showing the gilt market plunging, and Sky’s Economics Editor Ed Conway also commented that financial markets were “considerably less sanguine” having digested the detail of the Budget.
Alongside a graph showing the cost of borrowing rising, Mr Conway said: “Markets were sanguine about the Budget when Rachel Reeves was delivering it.
“But now investors are absorbing the actual details and numbers, they’re considerably less sanguine. UK government cost of borrowing climbing.”
Ms Reeves also announced a £40 billion increase in taxes, including a £25 billion raid on employers’ national insurance contributions and a rise in capital gains tax.
The OBR said tax increases would partly lead to “crowding out” of business investment, which would have 0.2% negative impact on economic growth in the medium-term.
The forecaster also said the latest financial policy measures are set to leave the Government with a buffer of £9.9 billion to balance the state finances by 2029/30.
This is significantly less than the £28 billion average headroom for previous chancellors and would not have been met were it not for new changes to its fiscal debt rules.
The fresh forecast also shows that UK inflation is set to be higher than expected for the next four years and remain above the Bank of England’s target rate.
Ms Reeves, delivering her first Budget, told Parliament on Wednesday that the forecaster has predicted that Consumer Prices Index (CPI) inflation will average 2.5% this year.
