Markets at risk of more government-induced turmoil

The Bank of England appears to have prevented the financial market fallout from the loose fiscal plans revealed in the Chancellor’s mini-budget from escalating into a full financial crisis. Since it committed to buy £65bn of long-dated gilts on Wednesday, 30-year gilt yields have fallen back sharply. But gilt yields of most maturities remain higher than before the mini-budget and at $1.10 the pound remains lower. There is a clear risk that the political backdrop prompts further large swings in gilt yields and the pound in the weeks before the Chancellor is due to lay out his fiscal rules on 23^rd November. Or those rules may prove too loose for the market. We think the pound will end the year around $1.05, but it wouldn’t take much of a resurgence in concerns about the UK’s fiscal outlook to prompt it to fall to parity.