British Pound Falls as UK Budget Deficit Surges
The British pound (GBP) fell to $1.35, the lowest in two weeks, after UK borrowing data sharply missed expectations. The pound held its ground against the majority of its counterparts following the Bank of England’s latest interest rate decision.
Public sector net borrowing hit £18 billion in August, the highest for the month in five years and well above forecasts of £12.7 billion.
UK borrowing in the first five months of the fiscal year reached £83.8 billion, £11.4 billion above the Office for Budget Responsibility (OBR) March forecast, with prior months revised higher by £5.9 billion.
The figures add pressure ahead of the autumn budget and come amid global concerns over sovereign debt, which recently pushed 30-year gilt yields to record highs.
The Bank of England left interest rates on hold at 4% and will slow the pace of its “quantitative tightening” programme in the year ahead to avoid distorting jittery government bond markets.
Benchmark rates were unchanged, as the inflation rate in the UK holding steady at 3.8% in September, the highest in more than 19 months and nearly double the Bank of England’s 2% target.
The central bank’s nine-member monetary policy committee voted 7-2 to leave borrowing costs unchanged, after five cuts since summer 2024, including a reduction last month.
The Bank of England will slow the pace at which it is reducing its government bond holdings and skew sales away from longer-dated debt to help limit the impact of quantitative tightening on the gilt market.
Traders modestly extended long-term easing bets. In the US, the Fed cut rates by 25 bps and signalled 50 bps more this year, though Powell stressed it was not the start of a full easing cycle.
The Bank of England will probably refrain from cutting interest rates further this year but sterling could weaken as this is priced in and U.K. fiscal sustainability concerns are building, Rabobank’s Jane Foley says in a note.
Markets remain squarely focused on the U.K.’s difficult budget position, she says. Friday’s worse-than-expected U.K. public sector borrowing data for August provided a “timely reminder” of this and the challenges that await Treasury chief Rachel Reeves as she prepares for November’s autumn budget, she says. Nigeria Eurobonds Yield Tracks Below 8% on Bargain Hunting
