UK Markets Steady as Healey’s Budget Delivers Fiscal Discipline and Stability
Market Reaction and Fiscal Policy Overview
By Samuel Indyk and Johann M Cherian
Initial Market Response to Healey's Budget
LONDON, Oct 28 (Reuters) - UK markets took finance minister John Healey's first budget in their stride on Wednesday, taking comfort from the pledge to stick to the government's borrowing rules.
Borrowing costs globally have hit multi-year highs recently and financial markets had been looking for reassurances from Britain's new finance minister that he would adhere to fiscal discipline.
Fiscal Headroom and Expectations
Healey said the headroom - the amount of extra spending or tax cuts the government can make under its own fiscal rules - stood at £15 billion ($19.93 billion), in line with expectations from a Reuters poll, but below the £23.6 billion in March.
Bond Market Performance
Britain's 10-year government bond yield was down 3 basis points on the day at around 5.31%, while the 30-year yield was down 4.5 bps at around 5.70%, as prices rose.
Expert Commentary on Budget Impact
"The bond market is calling it a very boring budget - yields a couple of basis points lower at the long end and virtually unchanged elsewhere. So nothing that's going to change the fiscal picture for the UK significantly," said Kathleen Brooks, research director at XTB.
"Even though we're borrowing more nominally, it's not having an impact on markets and it's not a worry for investors. The reason why is because the government is capitalising on the better growth forecasts," she said.
Investor Sentiment and Historical Context
A low-key budget could be welcome news for investors in British assets, who still remember the 2022 mini-budget of former Prime Minister Liz Truss that led to a bond market meltdown, triggered by unfunded tax cuts.
"I think the whole part of this today was to really avoid a Liz Truss moment," said Mike Bell, head of market strategy at BlueBay Asset Management.
"He's (Healey) been successful -- the headroom came in almost exactly in line with expectations. It doesn't give investors in gilts anything to panic about in the near term, which of course was the goal today."
Currency and Equity Market Movements
The pound was down 0.1% to $1.3295 after earlier hitting a 1-1/2-week low. It was down 0.2% against the euro at 83.75 pence.
The blue-chip FTSE 100 index was up 0.3%, broadly in line with gains in other major European stock markets. The FTSE 250, which generates a greater proportion of its revenue domestically, was up 0.3%.
Banking Sector and Tax Changes
Britain's biggest lenders welcomed a smaller-than-feared tax hike on their profits. The banking tax hike comes via an increase on the surcharge they pay on profits above a set threshold from 3% to 6%, partially reversing a cut from 8% three years ago under then-Conservative Prime Minister Rishi Sunak.
Shares in Lloyds, Barclays and NatWest were up between 3.3% and 3.6%.
Analyst Perspective on Banking Surcharge
"The additional surcharge represents a modest and temporary earnings headwind rather than a fundamental change to the investment case for the sector," said Gary Greenwood, equity research analyst at Shore Capital.
($1 = 0.7527 pounds)
(Reporting by Samuel Indyk, Dhara Ranasinghe and Johann Cherian; Editing by Amanda Cooper and Dhara Ranasinghe)
