FX.co ★ UK Bond Selloff Eases on Better UK Forecasts

The UK 10-year gilt yield adjusted to 4.513% after an initial spike of 13 basis points to 4.57%. This shift followed reports clarifying that Chancellor Rachel Reeves is abandoning planned income tax increases due to an improved fiscal outlook from the Office for Budget Responsibility (OBR), rather than because of political pressure. The OBR's revised forecast now predicts a budget deficit of approximately £20 billion, down from an earlier estimate of £35 billion. This improvement is attributed to stronger government revenues and robust wage growth. Nonetheless, Reeves is expected to generate revenue through alterations in tax thresholds and reforms to salary-sacrifice schemes, thereby upholding Labour's commitment not to increase headline income tax rates. She had prepared two budget scenarios: one incorporating significant tax increases, and another relying on more modest measures. Reeves is now opting for the latter strategy. This development occurs amid cabinet divisions and follows the recent political instability surrounding Prime Minister Keir Starmer. In response, markets have adjusted their expectations for Bank of England rate cuts, with a roughly 75% probability now factored in for a potential move in December.