Sajid Javid’s resignation as UK chancellor jolted financial markets on Thursday, as investors bet that his replacement Rishi Sunak would be more likely to unveil a big spending boost in next month’s Budget.
The pound pushed higher after news of Mr Javid’s departure broke, and by mid-afternoon was trading 0.7 per cent higher at $1.3045 against the dollar, its highest in a week. UK government bond prices slipped, pushing the 10-year yield 0.07 percentage points higher to 0.65 per cent.
The market moves “clearly indicate that expectations are increasing for fiscal stimulus announcements to be made at the March budget,” said Mohammed Kazmi, a portfolio manager at UBP.
Investors are calculating that Mr Sunak, a close ally of prime minister Boris Johnson, will be more inclined to deliver a big fiscal stimulus on March 11. Ahead of December’s election, Mr Javid had persuaded Mr Johnson to adopt a commitment to balance the day-to-day budget by 2022-23, limiting the scale of any spending spree.
Looser fiscal policy is expected to boost growth in the short term, lessening the chance of a reduction in interest rates by the Bank of England. Although the BoE kept rates on hold in January, the lingering possibility of a rate cut in the coming months had weighed down sterling.
Javid’s departure “makes us think that the Budget will look very different than expected,” said David Zahn, head of European fixed income at Franklin Templeton. “The new chancellor will want to put his own mark on the budget leading us to believe it will be much more expansionary in nature. A commitment to more spending from the government is consistent with Boris Johnson’s plans to level up the UK and invest in the North.”
Mr Sunak would have to fund any increase in borrowing by issuing more government debt, which Mr Zahn said would push up borrowing costs.
“Overall, the direction of travel for the government is clear and this reinforces our view that gilt yields should rise as more is revealed about the upcoming Budget,” he said.
