LONDON: Britain’s new government is unlikely to upset investors in its first budget this month and its debt outlook is more positive than financial markets seem to believe, senior executives at Global Asset Manager PIMCO said.
Minister of Finance Rachel Reeves is due to announce its debut tax and spending plans on October 30, just over two years after then-Prime Minister Liz Truss plunged the UK government bond market into crisis with plans for major tax cuts.
Speculation about increased borrowing by the government of Prime Minister Keir Starmer – whose centre-left Labor Party returned to power in July after 14 years in opposition – contributed to the weaker performance of habits in recent weeks.
“We really expect the fiscal outlook in the UK to be tight and we continue to expect the deficit to come down in the coming years,” Peder Beck-Fries, a senior vice president at PIMCO, told Reuters in an interview with executives from the firm on Wednesday.
“We would be surprised if the government announced something that would cause the markets to question it.” fiscal reliability which we have seen in the UK over the last two years.”
Beck-Fries said he believed financial markets would anticipate more interest rate cuts by Bank of England after markets and the BoE realized that the outlook for inflation and growth was lower than they thought, following similar changes in the United States, Canada and New Zealand.
“We continue to like UK government bonds,” he said. “I think one of the key assumptions is that we think the bottom rate that is priced in the financial markets looks high relative to our expectations and that inflation will continue to come down.”
Gilts in favor
British government bond prices rose sharply on Wednesday after weaker-than-expected inflation data, but those gains pared only some of their recent lackluster performance.
“Hog yields are attractive on an absolute yield basis, but we would also expect some potential capital appreciation for these holdings over time,” Beck-Fries said.
Andrew Balls, PIMCO’s chief investment officer for global fixed income, said Britain’s expected fiscal restraint from the new government contrasted with much larger deficits in the United States.
“We tend to favor the young as one of the best global sources of longevity,” Balls said, speaking in the same interview.
As for Britain’s economy, Beck-Fries said weak productivity improvements, tighter immigration controls and higher unemployment rates since the pandemic meant growth was likely to remain at around 1% to 1.25 % per year, similar to the Eurozone.
Balls said one area for optimism was the government’s plan to cut red tape and speed up infrastructure and housing.
“It’s not easy for a government to get productivity growth up, but to the extent that they’re able to do it in the planning permission stuff, (it) looks like a positive if they can do something significant there,” he said.
