Image © Gov.uk

News that UK public borrowing in December massively undershot expectations is good news for Chancellor Jeremy Hunt, and the Pound, according to foreign exchange analysts.

The ONS said on Tuesday that public sector net borrowing was £7.8BN in December, which was far lower than the market consensus, which was close to £14BN.

"The release of the latest UK government borrowing data provided some relatively good news," says Jane Foley, Senior FX Strategist at Rabobank.

Capital Economics reckons Hunt will find additional "headroom" against his fiscal mandate now stands at about £20BN in the upcoming Budget, up from £12.9BN in the November Autumn Statement.

"December’s better-than-expected public finances figures brought some cheer for the Chancellor after the recent run of poor outturns and will give him a bit more wiggle room for a big pre-election splash in the Spring Budget on 6th March," says Ruth Gregory, Deputy Chief UK Economist at Capital Economics.

For the Pound, any expansion in spending could boost economic growth and delay the first rate cut at the Bank of England, which are both supportive developments.

"The better-than-expected data will reinforce the likelihood that UK Chancellor Hunt will be lining up tax cuts for his March 6 spring budget. On first sight, this should help support the UK’s lacklustre growth outlook and add to the cautious tone of the BoE. The data may thus be construed as GBP supportive," says Foley.

Helping the government's coffers was the decline in interest payments on debt, which have fallen as the increase in the Retail Price Index (RPI) has slowed markedly from a peak of 14.2% year-on-year.

Debt interest stood at £4.0BN in December 2023, which is £14.1BN less than in December 2022.

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"Sterling was little changed following better-than-expected public finances. However, the information value will not be lost on GBP investors ahead of the March 6th Spring Budget," says Kamal Sharma, a foreign exchange strategist at Bank of America.

The March budget forms one of the Pound's near-term event risks, with markets wary of a repeat of the ill-fated Liz Truss budget of September 2022.

Above: Falling debt repayments could offer the government a lifeline. Image: Capital Economics.

The budget is the final major set-piece delivery from the current Sunak administration ahead of the 2024 election, and Sharma says investors have been concerned about its contours.

"The anchor for their views is September 2022 and the dislocation that the Autumn Statement caused. The improvement in public finances perhaps reduces this tail risk," he explains.

The latest government borrowing figures are therefore seen as "supportive for our cyclically bullish views on GBP," says Sharma.

He does caution that Pound faces sizeable structural constraints; after all, debt is running close to 100% of annual GDP, while economic growth continues to track a sideways path.

"On an absolute basis they still suggest that fiscal conditions in the UK remain far from strong," says Foley.

Nevertheless, Foley is constructive on the Pound Sterling medium-term and backs the Pound to Euro exchange rate to gradually appreciate to 1.19.

Bank of America is also cautiously constructive:

"Whilst we are encouraged by the positive cyclical backdrop which is supporting our constructive GBP view, we are cognisant that these headwinds are a significant barrier to some investors thinking about medium-term GBP allocations," says Sharma.