As financial traders milled around 26 floors up in a tower in the Canary Wharf district of London, there was little sign of nerves ahead of Rachel Reeves’s second budget – until the surprise accidental early release of the government’s official economic analysis started to move markets.
Headline numbers from the Office for Budget Responsibility (OBR) flashed through on banks of computer screens, followed shortly by the detailed analysis itself.
“Boom! There’s your 200-pager,” said Will Marsters, a sales trader at Saxo UK, a trading platform that hosted the Guardian for the announcement. The leak triggered a race across trading desks in the City of London to understand the implications of the leaked forecasts – and laughter at the hapless forecaster.
It was a chaotic start to the budget, but more important for financial investors and the Treasury was the reaction on currency and bond markets. The Labour government was desperate to avoid a repeat of the Liz Truss “mini-budget” debacle, when borrowing costs surged, eventually bringing about the downfall of the Conservative government.
The reaction on Wednesday was choppy, but not dramatic by the standards of the Truss government. The yield on the benchmark 10-year gilt – a measure of the cost of government borrowing – dropped quickly from 4.5% to about 4.42%. A few minutes later it was back up above 4.52%.
By the late afternoon yields had fallen back once more, to 4.4%. The declining borrowing cost over the day will likely be a relief for Reeves – and a sign that markets do not think lending money to the UK has become more risky.
“The tempered growth didn’t seem too optimistic, which eroded some of the risk premium,” said Marsters.
Neil Wilson, an investor strategist at Saxo UK, said: “There’s no great stinging surprise that has upset markets. That has allowed it to be a bit of a relief.”
However, he wondered about the credibility of the forecasts: governments often promise to tighten budgets in later years in order to make the sums add up. With elections expected around the same time, he said the prospect of welfare cuts or tax rises in four years’ time was remote.
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“You’re saying we’re going to buy fiscal restraint by the end of the parliament,” Wilson said. “‘Don’t worry about welfare – we’ll sort it out’.”
The value of the pound also jumped in initially volatile trading after the OBR leak. It then fell as low as $1.3124, before recovering by late afternoon to $1.3229 – an increase of 0.5% for the day.
Mike Owen, another sales trader, said: “Everyone was fearing the worst, so the price action is, ‘Phew’. It’s such a minefield to try to get through it.”