Pound suffers biggest fall in 18 months as UK borrowing costs SOAR day after Labour's tax-raising Budget

Kyle Chapman, FX Market Analyst at Ballinger Group said: "Sterling drops to a two-month low as post-Budget gilt selloff intensifies.

"Bond investors are continuing to dump gilts this afternoon after Reeves’ borrowing plans proved to be higher than expected."

The Pound to Euro exchange rate has dropped in the todays afternoon trade, dipping below 1.19 to hit 1.1868.

And the Pound to Dollar exchange rate has fallen half a per cent to 1.2897.

Investors are dumping UK Government bonds, fearing that the UK's debt sustainability is less assured now that the Government intends to borrow at least an additional £124billion over the next five years.

Kathleen Brooks, research director at XTB said: "There is a sense of panic around this budget, which is akin to the Liz Truss Budget."

UK borrowing costs hit a new five-month high on Thursday as investors digested the additional borrowing outlined in Labour's first Budget in 14 years.

Gilt yields, the interest rates paid on British Government bonds have risen in the past 24 hours.

The yield on 10-year gilts rose 0.04 percentage points to 4.39 per cent , while two-year yields increased by the same amount to 4.35 per cent.

This follows volatile trading on yesterday when the bond market reversed an initially positive reaction to Chancellor Rachel Reeves' Budget announcement.

Analysts attribute the market response to the government's plans for a £28bn annual borrowing increase over the parliament.

The Office for Budget Responsibility described the Budget as "one of the largest fiscal loosenings of any fiscal event in recent decades". Debt sales are projected to reach £300bn in the current fiscal year, up from the previous estimate of £278bn.

Analysts at ING said “What immediately stands out is just how much borrowing is projected to rise over the next few years,” in a note in response to rising yields on Wednesday.

“We’ve argued for some time that the government had little choice but to raise real-terms spending. But what has been delivered is undoubtedly higher than many had expected just a few weeks ago," they added.

Mohit Kumar, a fixed-income analyst at Jefferies, noted that the immediate concern for the market would be "fiscal expansion funded by long-dated issuance".

The OBR warned that the additional borrowing had not been fully anticipated by investors and could lead to higher interest rates over the next few years.

Despite the significant market reaction, the current situation differs from the September 2022 'mini-budget crisis' under Liz Truss.

At that time, unfunded tax cuts led to severe bond market swings that threatened UK pension funds and required Bank of England intervention.

Analysts note that such volatility is less likely now, largely due to lower inflation rates. Current headline inflation stands at 1.7 per cent, compared to 10.1 per cent during Truss's appointment.

However, some experts suggest Reeves' budget may prove mildly inflationary - Goldman Sachs analysts believe it could reduce the urgency for sequential interest rate cuts in the near term.

Some analysts believe the Budget may impact the Bank of England's interest rate decisions.

Andrew Sheets, global head of corporate credit research at Morgan Stanley, told CNBC: "[The budget] is probably going to raise our forecast for growth in the U.K. over the near-term, but it could also provide a little bit of upward pressure on inflation."