The International Monetary Fund (IMF) has sent a clear signal to the UK government, warning that the budget crisis triggered during the 2022 Truss administration continues to leave a deep imprint on the UK gilt market. Any radical fiscal measures could once again trigger severe market volatility. The IMF's Article IV consultation report notes that the "mini-budget" episode not only led to policy reversals and leadership changes but fundamentally altered the bond market's behavioral logic. Consequently, UK gilts have become significantly more sensitive to domestic fiscal policy.

According to the report's analysis, while global macro factors still dominate most of the volatility in UK gilt yields, the influence of domestic policy factors has been strengthening since 2022. Particularly against the backdrop of increasing fiscal budget uncertainty, market reactions to the country's fiscal condition have become more intense. The IMF emphasizes that policy credibility and predictability are key to restoring market confidence and eliminating the negative impacts of the previous crisis. Meanwhile, the investor structure of the UK bond market is undergoing subtle changes. Pension funds' willingness to allocate long-term gilts is declining, while participation from foreign investors and capital more sensitive to market prices is rising. This structural shift could make the market more vulnerable to capital flow shocks.

For the newly formed government, this report undoubtedly presents a severe test. Facing internal pressure to increase public spending and a complex external environment characterized by weak economic growth and persistent inflation, the room for fiscal policy formulation is significantly squeezed. The IMF's stance is clear: only by adhering to credible and predictable fiscal discipline can the UK avoid repeating past mistakes. Any signs of deviation from this path could be amplified by fragile market sentiment, leading to soaring gilt yields and currency depreciation. This sets a cautious tone for the early days of the new administration.