Author Naomi Rovnick and Andy Bruce
London (Reuters) – British public finances, tightened by growing long and controversial growth, are faced with a key test of this month, which investors say could stimulate another shock on the market on an economy that is increasingly relied on with fickel foreign funds.
Finance Minister Rachel Reeves will submit an update of public finances on March 26, based on an assessment of the Budget Responsibility Office, the British Fiscal Guardian.
Reeves says that her fiscal rules, which aims to balance daily consumption against revenue and reduce net financial obligations in the public sector as a share of economics in future years, cannot be neglected.
But investors are afraid that the British risk falls into a painful trap in which to implement these rules – through a reduction in consumption or a higher tax – it damages the investment needed to improve long -term growth.
Britain has the largest current account deficit among advanced economies, ban the United States. The capital flows from the rest of the world and more and more the form of a short -term money, not a more recorded forms of capital such as direct investment.
This reliance on short -term capital, which can be easily withdrawn to sale, is higher in Britain than for any other main advanced economy that has a current account deficit, Reuters’ budgets show.
Strategist Bank of America Kamal Sharma said that the fiscal rules of Reeves took the risk of becoming a goal for merchants, much like courses during the Asian crisis of the late 1990s.
“The big question for many countries is how to grow an economy to the extent that you can reduce your debt profile? In the UK is certainly in the first place in the matter,” Sharma said.
“As the Asian crisis and recent discomfort in the UK and France have shown, the markets have sought to gravitate to some form of imaginary anchor – either fixed courses or fiscal rules.”
Felipe Villarroel, a partner, a twentyfour portfolio administration, agreed that there are some similarities between fiscal rules in the UK and a currency adjustment – even if comparisons with the emergency markets are overrated.
“It’s a bit dramatic. The UK is still highly rated a sovereign nation,” Villarroel said.
But he added that markets could still test the rule.
“Similarities have a difficult rule of telling people that you will adhere to you no matter what,” he said.
“When the situation develops and you seem to have to break (the rule), then the consequence could be a great volatility of the market.”
The British economy spread only 0.1% in the fourth quarter of 2024, and production unexpectedly decreased in January. The Bank of England halved the growth forecast of 2025 last month at 0.75%.
“The economy that has lost the ability to grow, it seems,” said the former Bank of England politics creator Willem Buiter.
“The reason why people are concerned about the budget in the UK is that the chances of having higher revenues are extremely bad.”
Vulnerable
A sharp sale of bonds and sterling in January – when markets around the world have taken care of US President Donald Trump’s program – pointed out in the UK markets. Last week’s Rump of the German Government, the costs of borrowing also withdrew yields in the UK.
The outflows from British funds in February reached an eight -month maximum in February, showed Lipper Data, while the share index at the UK FTSE 250 in the UK was reduced by about 5% from late January.
While the bond prices in the US cash register increased compared to a month ago, as Trump’s policy plans increased the fears of growth, GILTS – which usually carefully follow the treasuries – they sold themselves.
Brexit discomfort and episode “Mini Budget” 2022 under former Prime Minister Liz Truss briefly briefly brought some comparisons of investors between the Britain market and the emerging market. Prime Minister Keir Starmer and Reeves promised before the election in July 2024 that he would restore stability.
But 10 -year gilding yield has also shown greater volatility in the last six months – measured by its standard deviation – than any other Western European equivalent.
Asked if she was concerned about the possible adverse reaction to her statement on March 26, Reeves said she would not comment on preparations.
“We took the action that was needed in October to secure our public finances,” Reuters said on the southern G20’s margins in South Africa, referring to the first budget of the Labor Government.
Reeves says it will act if necessary to meet its budget rules.
Reeves reaction
BNP Paribas said the market can operate drastically on March 26 as panic. Instead, Reeves could commit to reducing wear in the near future, and perhaps even tax measures later in parliament.
“Ultimately, we think that the Government will approach the combined approach, not responding too fast to market pressures, nor putting all the eggs in one basket,” said BNP Paribas Economist Paribas Stoilova.
Van Luu, head of the currency strategy and fixed income at Russell Investments, said that Sterling and Government debt would better respond to reducing consumption than tax increase.
“In the end, this is a political choice, what the Government does, but the market participants would surely prefer to prefer a reduction in wear,” he said.
Fixed Fixed Income Manager Liam O’Donnell said GILTS is not unattractive in current yields.
“But the most important swing factor,” he said, “is the lack of a fiscal room available to the Government of Labor.”
(Reporting Naomi Rovnick and Andy Bruce; Mounting Dhara Ranasinghe and Catherine Evans)
