In the following updates, economists from PIMCO share their views following today’s UK Budget. They highlight why gilt markets cheered in the short term – but caution on what lies ahead for the UK’s fiscal outlook, as the Government’s back-loaded fiscal plans raise medium-term concerns about deficit reduction and debt sustainability.
Peder Beck-Friis, Economist at PIMCO, said: “By recommitting to her fiscal rules and meeting them with more headroom than expected, the Chancellor did enough today to deliver a relief rally in gilts. The additional risk premium that was priced in after the income tax U-turn has now been largely priced out, and over the next few months markets can now re-focus on inflation, the labour market and the likelihood of renewed rate cuts from the Bank of England. Our view remains that a weakening labour market and softening inflation will result in a deeper rate cutting cycle than markets are pricing, and by helping to reduce inflationary pressures into next year the Budget has further reinforced those dynamics.”
Rupert Harrison, UK Senior Advisor at PIMCO, said: “Despite an immediate relief rally in gilts, the Budget has incrementally added to medium term concerns about this Government’s ability to control spending and deliver the falling deficit path set out in the OBR forecasts. By adding to spending, loosening fiscal policy over the next three years, and back-loading the tax rises and spending restraint needed to hit the fiscal rules in 2029, the Chancellor is asking markets to trust her commitment to be fiscally prudent in the future, just not yet. Instead of relying on a five-year forecast, we think it increasingly makes sense to focus on actual delivery of the deficit reduction path without further slippage over the next two years – and especially proof that the UK can reach the crucial level of 3% which starts to stabilise the debt to GDP ratio.”
