Markets shrug off Budget as bank shares rally
British markets took Chancellor John Healey's first Budget in their stride on Wednesday 28 October, with stocks, bonds and sterling barely moving after he pledged to stick to his fiscal rules while accepting a smaller fiscal cushion. Healey said the headroom, the amount of extra spending or tax cuts possible under the government's own rules, stood at £15 billion, in line with a Reuters poll of economists but below the £23.6 billion projected in March. The 10-year government bond yield fell 2 basis points on the day to 5.323%, while the 30-year yield fell 3 basis points to 5.711%, as prices rose.
A £15bn cushion, gilt yields ease
Sterling was down 0.1% against the dollar at $1.3298 after earlier hitting a one-and-a-half-week low, and down 0.1% against the euro at 83.72 pence. The blue-chip FTSE 100 index rose 0.1%, broadly in line with other major European markets, while the domestically focused FTSE 250 rose 0.4%. The calm reaction came despite a downgraded outlook for next year: the Office for Budget Responsibility cut its 2027 growth forecast by 0.6 percentage points to 1%, the weakest since the pandemic, while upgrading 2026 growth slightly to 1.2%.
Banks rally, but a rate rise looms
Bank shares were the clear winners after the much-anticipated raid on bank profits proved more modest than trailed. A temporary increase in the bank surcharge from 3% to 6% will raise £1.5 billion over 15 months, partially reversing a cut from 8% three years ago, and shares in Lloyds, Barclays and NatWest rose between 3.3% and 3.6%. Market strategists called it a reassuringly dull Budget: Wren Sterling's Rory McPherson said there were no big upsets, while XTB's Kathleen Brooks said the bond market was calling it a very boring Budget. The calm may not last: the Bank of England is on course to raise interest rates for the first time in three years next week, with the base rate likely to hit 4%, as inflation heads towards 4% by the end of the year.
