STERLING SHOCK
Pound suffers biggest drop in 18 months after Rachel Reeves Budget tax bombshells – what it means for your money
Plus, government borrowing costs have hit their highest level since August 2023
MONEY markets have rebuked Rachel Reeves’ budget with a sell-off sending government borrowing costs shooting higher than Liz Truss’s market meltdown.
In a dramatic rout, the pound also fell sharply, and UK stock markets slumped as traders punished the Chancellor's decision to run up even more debt to fund her £70 billion investment spending spree.
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Investors have been spooked by the Budget watchdog's warning that inflation will remain stubbornly high above 2%.
This is expected to reduce the chances of the Bank of England cutting interest rates as fast as they thought.
Bond traders have pushed the interest rates, known as yields, on 10-year government bonds up to 4.56% on Thursday afternoon, surpassing the levels seen during the turmoil of the Liz Truss mini-budget.
This means government borrowing costs are at the highest level since August 2023, when markets were worried about sky-high inflation.
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Bond yields rise when the price of bonds falls to reward investors with extra interest for holding riskier assets.
They had already moved higher on Wednesday in the wake of Rachel Reeves' Autumn Statement.
The Chancellor announced almost £70 billion of extra spending each year, funded by business-focused tax hikes and additional borrowing.
The Office for Budget Responsibility (OBR) called it "one of the largest fiscal loosenings of any fiscal event in recent decades".
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Analysts said the bond movement was a sign that markets were responding negatively to the increase in spending.
One investment banker told The Sun: "This will all implode. Markets won't have it."
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Kathleen Brooks, an analyst at trading firm XTB, said the movement indicated that the Budget "has not been well received" by markets.
She said: "This is another sign that the Chancellor overestimated the market's desire to absorb more sovereign debt issuance from the UK."
The scale of the bond sell-off is not as dramatic as in "Kwarmageddon", when pension funds were dumping gilts at a rate rapid enough to warrant the Bank of England to step in.
However, traders raised concerns that it was the days that followed the mini-Budget and then Chancellor Kwasi Kwarteng's warning of more tax cuts to come that really panicked the markets.
One market expert said: "How Reeves handles things in the next few days is critical to avoid the very market collapse she was scared of."
What are gilts?
GOVERNMENT bonds, or gilts, are seen as the telltale sign of global investors' opinion on the health of the UK economy and its leadership.
They also shape investors' views on whether a Budget has been a success or failure.
Gilts are issued by the Government as parcels of debt that pay out a return — or coupon — to investors over a fixed term, such as five, 10 or 30 years.
The yield reflects the amount of interest paid, and increases when the price of a bond falls to reward the investor for the risk of holding a cheaper asset.
Yields increase when the price of a bond falls because investors want bigger returns for owning a riskier asset.
POUND TUMBLES
As well as a rise in gilt yields, the pound briefly dropped 0.81% to as low as $1.28 against the dollar this afternoon, down from $1.30.
This is its weakest level since August, and its 1.2% slump over the past three days marks it as one of the sharpest sell-offs in 18 months.
Compared to the euro, the pound is trading 0.81% lower at €1.18.
The FTSE 100 lost 0.61%, or 49.53 points, to 8,110.10, while the FTSE 250, which is seen as a better indicator of the UK economy, dropped 1.47%, or 305.16 points, to 20,388.96 points.
Downing Street would not comment on the market reaction, with a spokesman saying: "It's a matter of Government policy not to comment on market fluctuations."
Simon French, chief economist at Panmure Liberum, told The Sun: "Investors are uncomfortable with the government taking tax off households and the private sector and giving it to the public sector, which arguably has not been as efficient.
"It is not pro-growth. This could also be the moment that the bond market decides that the UK is carrying too much debt."
Matt Britzman, an analyst at investment firm Hargreaves Lansdown, said yields will be "watched closely" in the aftermath of the Budget.
He said investors are "re-assessing where UK interest rates might end up, given that the investment plan for growth is likely to add inflationary pressures into the economy."
INFLATION UP
The OBR's latest forecasts on the spending plans indicate that inflation is set to stay above the Bank of England’s target of 2% until 2029.
This means inflation is predicted to average 2.5% this year and 2.6% next year.
The official forecaster said that inflation would then come down, assuming "the Bank of England responds" to help bring it to the target rate.
Inflation is a measure of how much the prices of goods and services have changed over time.
The Bank of England has used higher interest rates in recent years to help bring down the rate of inflation after it soared to 11.1% in 2022.
The interest rate, which helps to dictate mortgage rates, currently sits at 5% after most recently being reduced in August by Bank policymakers.
The Bank of England will decide whether or not to cut the base rate when its Monetary Policy Committee meets on November 7.
What does this mean for my money?
A fall in the value of sterling is bad news for holidaymakers, who will find they get less travel money at the Foreign Exchange.
If the value of the pound versus the dollar is $1.30/£1 then for every £100 you change up, you get £130 dollars.
If the pound to dollar exchange rate drops to $1.28/£1 then you'll only get $128 for £100 holiday spending money.
That means buying anything abroad seems more expensive and can impact what you can afford to do on your holiday.
You can take some steps to make your travel money go further.
Ordering your cash online in advance will help avoid a last-minute rush at the airport, where the exchange rates are typically much worse.
TravelMoneyMax at can help you compare rates from different bureaux de change.
Overseas spending cards mean you don't have to worry about carrying wads of cash, too.
A weaker pound can also impact the value of your pension or any investments you might have.
This is because if you hold shares in a company based overseas, their value is affected by currency movements.
If you notice a dip in the value of your investments, it's best not to panic or be tempted to sell.
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Elevated inflation rates, which rise above the Bank of England's 2% target, could deter it from reducing interest rates in the near future.
This could be painful for mortgage holders waiting to remortgage, hoping for sooner rate cuts.
Why does inflation matter?
INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
The government sets an inflation target of 2%.
If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending.
High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we're earning.
Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate.
But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs.
See our UK inflation guide and our Is low inflation good? guide for more information.
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