Pound falls sharply and government gilt interest rates up after major budget tax rises

The pound has fallen sharply after the chancellor announced the biggest tax rises in a generation.

Over the last three days, sterling has dropped by 1.2% (in trade weighted terms) – the biggest fall in 18 months.

Between around 1.30pm and 5.30pm today, versus the dollar, it dropped from about 129.9c to the pound to about 128.6c. In the same period, against the euro, it went from 119.3c to the pound to about 118.4c.

In addition, yields for 10-year UK bonds – the cost or interest rate charged for long-term government borrowing – have gone past 4.5% for the first time in a year.

Ed Conway, Sky News’s economics and data editor, said those yields are “pretty much halfway towards the danger zone” – a zone identified by the Office for Budget Responsibility (OBR).

However, he said other European bonds had risen, too. “But the UK does seem to be moving faster than most of the others,” he added.

While cautioning that the budget is still very new, Conway said the “upshot” is that Rachel Reeves’s “room for manoeuvre” is already diminishing “because of market moves”.

Markets are reacting in “quite a violent way”, Conway said.

“It’s really unusual to see this after a budget, and that will have a bearing on how much this government will be able to afford in the future,” he added.

A sudden rise in the yields of 10-year UK bonds followed Liz Truss’s disastrous “mini-budget” of September 2022, which led to a surge in the cost of borrowing for ordinary consumers, while the pound slumped to a 37-year low against the dollar.

It is “certainly not like that at the moment”, Conway said.

Nonetheless, market movements will be “enough to really concern people at the Treasury”, he added, “because it suggests that a lot of traders are looking at how much money this government is borrowing, and they’re saying: ‘Hang on, maybe we’re going to charge you more’.”

While Conway said it does not feel like a “crisis point”, he said the “calculus for this government” may be changing.

Jack Meaning, UK chief economist at Barclays, said market reaction was “materially different” to what happened in 2022.

Bond yields since Ms Reeves’s budget are up by about 0.3%, while in 2022 the rise was about 1.5%, he said.

The conversation Barclays is having with its customers is also different to that in 2022, Mr Meaning added.

At that time, people were wondering whether a “big crisis point” had been reached.

This time, he said the focus is on comments from the OBR about a potential rise in inflation, and the potential knock-on effect as the Bank of England makes decisions on interest rates in the next few months.

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The prime minister’s official spokesperson refused to talk about bond prices.

“We don’t comment on market movements,” they said.

“The chancellor has been very clear that first and foremost, this budget has been about restoring fiscal stability, and she’s outlined two new robust fiscal rules, which put public finances on a sustainable path.”