LONDON (Reuters) -British government bond prices fell sharply on Friday, stocks, particularly banks tumbled, and sterling hit its lowest level on the euro in over two years, following new reports that the UK budget later this month will not see expected income tax rises.
Britain’s 10 year government bond yield rose 10 basis points to 4.54%, set for its biggest one-day jump since early July. In contrast, equivalent German government bond yields were up just 2 bps.
Bond yields move inversely to prices.
The Financial Times reported Thursday, citing officials briefed on the decision that British Prime Minister Keir Starmer and finance minister Rachel Reeves have abandoned plans to raise income tax rates, changing course just weeks before a key November 26 budget.
That report comes as Starmer’s authority within his own ruling party comes under increasing strain.
Britain’s blue-chip FTSE index shed over 1%, with bank stocks such as Barclays Lloyds and Natwest falling over 3% each.
Traders said if Reeves did not raise income tax, higher taxes on banks may be needed to fill a fiscal hole.
The pound dropped nearly 0.5% on the dollar to $1.3129 and weakened sharply on the euro, with the common currency hitting 88.64 pence, its highest since April 2023.
It is typical for higher bond yields to send a country’s currency higher but on several occasions this year, worries about Britain’s fiscal position have seen government bonds and sterling sell off together.
“Clearly, the market had been hoping the government would take steps to deal with its fiscal shortfall and that would mean a rise in income tax,” said Jeremy Stretch, head of G10 FX Strategy at CIBC Markets:
“Now if the FT report is correct, then that confidence in its attempts to improve the fiscal position is going to be shaken.
“So, what we’re seeing is a lack of confidence from markets and especially the bond markets,” he added.
(Reporting by Alun John, additional reporting by Rae Wee in Singapore; Editing by Dhara Ranasinghe)
