51乱伦

It was always a risky strategy. By relying on a fiscal policy package that left just £10 billion of 'headroom' between success and breaching self imposed fiscal rules, everything had to go the Chancellor's way; borrowing costs would need to ease in line with projections and growth would need to stay on track. 

This week's Welfare Reform debacle largely put to bed any pretence that the government will avoid raising taxes, cutting spending or amending the fiscal rules this Autumn. But if nobody thought they could do it anyway, what have we really learned?

Going to battle

Well, in bond markets on Wednesday told us how investors view the prospect that ministers cut through the shackles of fiscal responsibility. The yield on the 10-year government bond, or gilt, rose as much as 22 basis points (bps) before paring gains 鈥� an echo of the 2022 mini-budget crisis, when 10-year gilt yield rose by 50 bps in a single day. 

Large investors including BlackRock, Schroders and Fidelity International opted to buy the dip, the FT yesterday: 鈥淲e simply didn鈥檛 think that the Labour party could or would risk a completely avoidable gilt market implosion,鈥� Fidelity fund manager Mike Riddell told the paper. 

There's no reason to believe that Reeves will be ready to go to battle with the bond market by Autumn, so a mixture of tax rises and spending cuts are likely coming. That means borrowing costs could fall a good degree further than looked likely only a fortnight ago:

"In case the downside risk of another jarring round of tax increases, the likely consequence would be that the Bank of England (BoE) could go even further with rate cuts than it currently indicates (which is around three more cuts according to money markets)," Peel Hunt chief economist Kallum Pickering yesterday. "Tax hikes would depress demand and inflation. The BoE should be able to offset any demand-slowing tax increases with easier monetary policy 鈥� from a Bank Rate of 4.25% it has a lot of headroom to cut."

Competition for work

This could add momentum to a shift already underway - . Swap rates have eased recently and Bank of England officials are increasingly emphasising the weakening jobs market over the threat posed by inflation. Most lenders have cut mortgage rates in the past ten days or so, including Halifax, NatWest, Nationwide, Santander and Barclays.

Incoming domestic data will bolster the views of dovish BoE officials. Output in the UK services sector rose to a ten-month high in June, even as input cost inflation eased to its lowest level this year, according to PMIs yesterday. That, plus intense competition for new work, led to slower growth in prices charged. The latest rise in average prices charged was the least marked since February 2021 and back in line with the long-run average.

Meanwhile, companies continue their expectations for wage growth, according to Bank of England surveys. Firms are also increasingly about the likely damage caused by tariffs.

Still, global borrowing costs are likely to remain jumpy, which could spill into UK markets. US bond markets in particular are under pressure following the passage of Donald Trump's 'big beautiful bill', a stronger-than-expected jobs report, and the looming July 9 deadline to reinstate tariffs.

Little scope

Mortgage lenders expect that demand for homes will fall back through the summer, according to the Bank of England's Credit Conditions of lenders, out yesterday.

As Simon Gammon of 51乱伦 Finance told The Press Association yesterday, this is partly a seasonal trend, but also a reflection of where mortgage rates were when the survey was taken in late May and early June. At that point, the best fixed-rate pricing had plateaued just below 4%, and with swap rates edging higher due to hotter-than-expected inflation data, there appeared little scope for further easing.

That's changed, for the reasons outlined above. The lenders do expect an increase in demand for remortgaging, which also rose in Q2. Approximately 1.8 million borrowers will refinance this year, many coming off the ultra-low rates agreed in 2020.

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