U.K. Budget Leaves Bonds In a State of Suspended Inanimation
"This budget is about much more than Brexit," Chancellor of the Exchequer Philip Hammond told Parliament on Wednesday. Yet the U.K.'s pending exit from the European Union was the main driver behind deep cuts in the Office for Budget Responsibility's forecasts for growth in the coming years (and just about every other policy measure he announced).
To put this in perspective, the downgraded projections mean gross domestic product per capita by the start of 2022 will be 500 pounds ($664) lower than was predicted in March, according to calculations by Matt Whittaker, the chief economist at think tank Resolution Foundation.
Weaker growth means more debt. The Debt Management Office duly added 29 billion pounds to the nation's planned borrowing in the coming five years, along with a surprise increase in this year's fiscal gilt sales to 115.1 billion pounds -- higher than the 114.2 billion pounds expected in March and confounding analysts' expectations for a reduction.
For bondholders, however, the two cancel each other out. The weaker growth outlook is likely to weigh on inflation in the coming years. That in turn reduces the likelihood that the Bank of England will follow this month's first increase in official borrowing costs for more than decade with further policy tightening beyond the couple of rate moves currently anticipated. Gilt yields have reached a state of suspended inanimation.
It might not last. The U.K. looks like an outlier in growth terms, with the rest of the world economy enjoying a renaissance; gilts may find a rising global tide lifts all yields.
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