UK Gilt Yields Rise as Government Hints at Fiscal Rule Changes

The UK government's borrowing costs have risen on global financial markets, following news that Chancellor Rachel Reeves is considering changes to Britain's debt rules, reports The Guardian.

Reeves, ahead of next week's budget, is expected to announce at the International Monetary Fund's annual meetings in Washington that she will modify the way the debt rule is calculated, potentially unlocking up to £50 billion for infrastructure investment.

This move, which aims to target public sector net financial liabilities, has triggered concerns among investors, leading to an increase in the yield on UK government bonds. The 10-year gilt yield is currently trading above 4.2%.

"It seems to be related to Reeves last night suggesting that the fiscal rules would be rewritten to increase spending on infrastructure," Lyn Graham-Taylor, a senior rates strategist at Rabobank, told Reuters.

The Guardian reports that the change to the fiscal rule, which is a broader definition of government debt, could have added £53 billion to headroom at the last budget in March.

Reeves' announcement in Washington is seen as aligning her with the IMF, which has gradually become more supportive of borrowing for investment purposes.

The news comes amidst a broader trend of falling global bond yields as investors anticipate interest rate cuts by major central banks in response to cooling inflation.

Andrew Bailey, the Bank of England governor, has suggested that UK inflation is falling faster than expected, hinting at the possibility of further interest rate cuts at the bank's next policy meeting in November.

"Disinflation – and the UK is part of this – has actually taken place faster than we expected it to," Bailey told an IMF meeting.

However, the recent economic data suggests a slowdown in the UK's private sector economy. The S&P Global Flash UK Composite Purchasing Managers Index fell to an 11-month low of 51.7 in October, reflecting uncertainty among businesses and consumers about the impact of the upcoming budget.

“Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the budget has dampened business confidence and spending," said Chris Williamson, chief business economist at S&P Global Market Intelligence, to The Guardian.

Separately, the CBI's latest survey revealed that sentiment across the UK manufacturing sector has fallen at the fastest pace in two years, signaling a decline in business confidence.