After the International Monetary Fund criticized the government's proposed 45 billion debt-funded tax cuts and the Bank of England inferred it would hike interest rates to counter the inflationary pressure the fiscal strategy may cause, U.K. bond yields surged to fresh 14 year highs.
The 10 year gilt yield TMBMKGB 10 Y rose by 4.4 basis points to 4.558% and the more monetary policy sensitive 2 year gilt yield TMBMKGB 02 Y, which gained 5.3 basis points to 4.670%. Bond yields move in the opposite direction to prices.
The selling brought benchmark borrowing costs to their highest since the depths of the global financial crisis in 2008. The 2 year has gone up more than 120 basis points in the last four days as investors dumped U.K. assets in response to new finance minister Kwasi Kwarteng's budget, which was delivered on Friday.
The International Monetary Fund released a scathing assessment of Kwarteng's proposals which included tax cuts and already announced energy support payments, which were mainly paid for by an extra 64 billion of bond issuance.
Given the elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this time, according to the International Monetary Fund. It is important that fiscal policy does not work at cross purposes with monetary policy. According to Huw Pill, chief economist for the Bank of England, the central bank may have to raise interest rates in response to the budget, despite the fact that it wouldn't make a decision until its November meeting in November.
I do want to flag clearly that the combination of fiscal announcements that we have seen will act as a stimulus. It is hard not to draw the conclusion that this will require a significant monetary policy response, Pill told a forum in London, according to Reuters.
The poundUSD was down 0.4% to $1.0689 on Wednesday, having dropped to a record low of $1.035 at the beginning of the week. The latest opinion poll put the opposition Labour Party 17 points ahead of the governing Conservatives, the biggest lead for Labour in more than 20 years.