Update On The UK Market

• On 23 September the newly appointed Chancellor announced a spate of tax cuts, funded through additional Government borrowing triggering a wave of selling in UK assets.
• The pound weakened sharply following the announcement, reaching as low as $1.03 against the US dollar the following Monday (26 September).
• UK government bonds (gilts) fell in value as yields rose significantly; but while UK equities also fell, the weaker pound helped investors in overseas assets.

Why are gilts selling off?

The energy price guarantee support to households and businesses, alongside permanent tax cuts, will likely lead to a marked deterioration in public finances from October, when the energy support package takes effect. Indeed, the Institute for Fiscal Studies and Citi have said the budget risks putting the UK public finances on an unsustainable path. The cost of the energy support package is unknown as it will depend upon volatile gas prices, but external estimates have placed the bill as high as £150bn. As the government embarks on tax cuts, the cost will need to be met by additional borrowing, and so the deteriorating fiscal position should lead to an increase in the supply of government bonds.

We expect the budget will deliver a short-term boost to demand, potentially lessening the depth of the current growth slowdown. However, it remains to be seen whether suggested tax cuts, promised deregulation and indeed the new real growth target, will do much to alter the longer-term growth outlook.