By Jamie Chisholm
U.K. bond yields surged to fresh 14-year highs after the International Monetary Fund criticized the government’s proposed £45 billion of debt-funded tax cuts and the Bank of England inferred it would hike interest rates further to combat the additional inflationary pressure the fiscal strategy may unleash.
The 10-year gilt yield /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y +2.73% rose 4.4 basis points to 4.558% and the more monetary policy-sensitive 2-year gilt yield /zigman2/quotes/211347169/realtime BX:TMBMKGB-02Y +2.29% gained 5.3 basis points to 4.670%. Bond yields move in the opposite direction to prices.
The selling pushed benchmark borrowing costs to their highest since the depths of the global financial crisis in 2008. The 2-year has jumped more than 120 basis points in just the previous four days as investors dumped U.K. assets in response to new finance minister Kwasi Kwarteng’s budget, delivered on Friday.
The International Monetary Fund late on Tuesday put out a scathing assessment of Kwarteng’s proposals, which included tax cuts alongside already announced energy support payments, mainly paid for by an extra £64 billion of bond issuance.
“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture,” the IMF said. “It is important that fiscal policy does not work at cross purposes to monetary policy.”
Indeed, Bank of England chief economist Huw Pill suggested on Tuesday that the central bank may have to quicken the pace of interest rate rises in response to the budget, though it would wait until its scheduled meeting in November before making a decision.
“I do want to flag clearly at this point that in my view the combination of fiscal announcements that we’ve seen will act as a stimulus…It is hard not to draw the conclusion that this will require a significant monetary policy response,” Pill told a forum in London, according to Reuters.
The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.1898% was down 0.4% to $1.0689 on Wednesday, having dropped to a record low of $1.035 at the start of the week. The latest opinion poll put the opposition Labour Party 17 points ahead of the governing Conservatives, the biggest lead for Labour in more than 20 years.