UK Budget Preview: Hamstrung Hammond - Nomura

On the face of it, an improvement in both last year’s deficit and the monthly public finance data published in the first six months of the current fiscal year appear to give the Chancellor some breathing space in Wednesday’s Budget, according to analysts at Nomura.

Key Quotes

“That would be to ignore the expected downward revisions that the Office for Budget Responsibility (OBR) is likely to make to its forecasts for productivity over the coming years. In turn that would mean notable upward revisions to the deficit forecasts further into the future – precisely at the time the Chancellor’s existing fiscal rules need to be met. As a result, Mr Hammond would be prudent to squirrel away any savings resulting from the recent better public finance news in anticipation of what is to come.”

“The upshot of all this is that we expect the funding requirement to be notably lower than previously anticipated for the current fiscal year (2017-18). However, our central assumption is that much of that reduction will be absorbed by fewer T-bills rather than any sharp adjustment to Gilt issuance. Of the total £11.5bn reduction in this year’s financing requirement that we expect, we see Gilt issuance being cut by just £1.5bn (in Q1 next year), with T-bill issuance being marked down by around £10bn.”

“Market reaction will, of course, depend on the exact details of what Philip Hammond and the OBR announce and the consensus going into the Budget. While we expect changes to Gilt issuance in the near term to be minimal, the possibility of a larger cut thanks to the lower financing requirement suggests risk/reward is skewed towards a rally on Wednesday.”