GBP/USD is down to a 5-day low, and 10-year gilts are underperforming. The UK fiscal backdrop is not pretty. Borrowing in the first eleven months of the 2024-25 financial year totaled £132.2 billion, reflecting both higher spending and lower tax receipts. This was £14.7 billion more than at the same point in the last financial year and the third highest financial year-to-February borrowing since monthly records began in 1993. It’s also £20.4 billion above the monthly profile consistent with the Office for Budget Responsibility (OBR) forecast, BBH FX analysts report.
BoE vote split pushes UK rate expectations higher
“Chancellor of the Exchequer Rachel Reeves will deliver the Spring Budget Statement next week and is expected to turn to public spending reduction rather than tax hikes to balance the books. Gilt issuance for the 2024/2025 financial year is forecast to be raised £10 billion to near a record sum of £310 billion.”
“Yesterday, the Bank of England (BOE) delivered on expectations and kept the policy rate steady at 4.50%. The BOE stuck to its guidance of ‘a gradual and careful approach’ to further rate cuts. However, the 8-1 vote split to stay on hold was a hawkish surprise and triggered an upward adjustment to UK rate expectations.”
“Staunch dove, Swati Dhingra, preferred to reduce Bank Rate by 25bps after voting in favor of a 50bps cut in February. Meanwhile, Catherine L Mann voted with the majority to keep rates steady after supporting a 50bps cut in February. Over the next 12 months, the swaps market continues to price-in 50bps of easing but have virtually fully priced-out odds of an additional 25bps cut.”
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