Bond Prices Plummet as UK's Budget Sparks Inflation Concerns

British government bond prices fell for a second day as investors assessed the inflationary impact of finance minister Rachel Reeves' first budget. Reeves announced significant tax hikes and increased borrowing to fund public services. This led to expectations of fewer rate cuts by the Bank of England.

British government bond prices tumbled for a second consecutive day, stirring concerns among investors about rising inflation following finance minister Rachel Reeves' inaugural budget. Reeves unveiled substantial tax increases and expanded borrowing aimed at funding public services, moves that have clouded expectations surrounding future interest rate cuts by the Bank of England.

The Office for Budget Responsibility predicted the budget would spur short-term economic growth, but also warned inflation could average 2.6% next year, overshadowing earlier forecasts of 1.5%. In response, investors stepped back from their bets on aggressive rate cuts by the central bank over the next 12 months.

The market reaction was swift, with two-year gilt yields jumping as much as 22 basis points to 4.539%, and ten-year gilt yields reaching a one-year high of 4.526%. The pound suffered, poised for its steepest two-day decline against the euro in two years, as skepticism over new fiscal strategies grew among financial experts and stakeholders.

(With inputs from agencies.)