UK Policy and Markets Outlook Amid Higher Energy Prices and Political Risk

The UK macro outlook is pressured by high energy prices and political risk, potentially reducing fiscal headroom by £12bn. While Gilt yields have spiked, the driver is primarily BoE repricing rather than domestic political instability.

Key Takeaways

• 1.Higher energy prices and lower growth are estimated to reduce the UK government's fiscal headroom by approximately £12bn (0.3% of GDP).
• 2.The recent sell-off in Gilt yields is primarily attributed to a sharp repricing of BoE monetary policy expectations rather than political risk.
• 3.Political uncertainty surrounding a potential Labour leadership change presents asymmetric downside risks for Sterling in the near-term.

Table of Contents

• Q1. What has driven the sell-off in Gilts?
• Q2. Where does this leave the government's fiscal headroom?
• Q3. How different might fiscal policy look under new Labour leadership?
• Q4. What are the potential implications for the BoE?
• Q5. What does this mean for markets?
• European Economics Team
• Disclosure Appendix

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