Borrowing costs recover from mini-Budget chaos as Sunak readies spending cuts

The Government’s borrowing costs have fallen back to levels last reached before Liz Truss's disastrous mini-Budget, handing Rishi Sunak a potential boost as he prepares to set out plans to confront the economic crisis gripping Britain.

Sterling rallied and yields on 30-year bonds dropped sharply as Mr Sunak, the new Prime Minister, promised to “place economic stability and confidence at the heart of this Government’s agenda”.

The Treasury can now borrow for three decades for 3.67pc, well below the more than 5pc peak after Ms Truss's plan for unfunded tax cuts set off a wave of fire sales in parts of the pensions market.

The pound buys $1.148, up 1.8pc on the day, meaning sterling is also trading above its pre-mini-Budget level.

A combination of lower borrowing costs, smaller expected rises in interest rates and recent falls in gas prices on international markets should improve the public finances and reduce the pressure on Mr Sunak and Jeremy Hunt, the Chancellor, to cut spending or raise taxes.

But the brighter fiscal picture may have come too late for the Office for Budget Responsibility (OBR) to include in projections due to be published on Monday alongside Mr Hunt’s next fiscal statement.

Martin Beck, chief economic advisor to the EY Item Club, said it risks forcing the Government to cut spending too hard, in turn worsening the economy’s prospects in a “doom loop” of downgrades and tighter policy.

He said: “It illustrates the risk of the OBR publishing forecasts in such a febrile period, that the numbers will not reflect the latest developments - which have been uniformly positive - therefore the forecasts will be too gloomy, and the Government might feel compelled to base policy on those forecasts.

“If you tighten policy too much, you end up with a weak outcome. It is self-fulfilling.”

The recovery in sterling was driven by a slump in the value of the US dollar against most world currencies after a fall in US house prices and consumer confidence.

The greenback’s strength has been one key reason for the weakness of the pound, as well as many other currencies around the world, but its sharp slide on Tuesday undid some of that shift in exchange rates.

Poor economic data from the US suggests inflation may slow, meaning fewer interest rate rises are needed by the Federal Reserve.

Traders’ confidence in Mr Sunak’s spending and borrowing plans has been enhanced by his decision to keep Jeremy Hunt as Chancellor of the Exchequer, following his reversal of almost every part of Mr Kwarteng’s mini-Budget.

Markets expect the Bank of England’s interest rates to peak at no more than 5pc next year, rather than the 6.25pc maximum which was briefly anticipated late last month.

It came as the Bank of England’s chief economist warned the Government it must “respect” the nation’s independent economic bodies if it is to avoid the chaos which engulfed markets in recent weeks.

Huw Pill praised the Office of National Statistics (ONS) for the way it interacts with the Bank in an “open, informative” way, contrasting that with the behaviour of unnamed “other institutions” since the mini-Budget in late September.

Speaking at an ONS conference in London, he said: “That is a model for how macro policymakers in the UK should respect the institutional framework where they interact with one another,” he “In my view we might have benefitted in recent weeks if the interactions amongst other institutions had followed that pattern.”

George Osborne, the former Chancellor, said the “the mistakes that the Truss government made were essentially both a fiscal mistake in thinking that the markets would tolerate a large amount of additional borrowing for unfunded tax cuts, but also dismissing the institutions”.

The OBR “was sidelined. The permanent head of the treasury was fired on day one. Privately, the ministers were very uncivil about the Bank of England. And all of these things undermined the institutions which provide credibility for British policy,” he told the so-called Davos in the Desert conference in Riyadh.