Gilt yields down and shares off lows as emergency Budget reassures on growth

UK shares were off lows in afternoon deals after the new government’s emergency Budget.

The FTSE 100 was down 64.43 points, or 1.22%, at 5234.7 points after chancellor George Osborne's speech.

Latest forecasts from the new independent body charged with drawing up growth estimates show growth will be lower this year and next and higher from 2012 and beyond once the impact of today's budget is accounted for.

Gilts had a rollercoaster ride during the new chancellor's first budget as investors weighed the impact of new forecasts of lower growth for this year and next but higher growth in the years ahead and the chancellor’s comment that he wants to eliminate the structural deficit during this parliament.

Yields on the benchmark ten year gilt fell to 3.40% during the budget before bouncing back to 3.45% by the time Osborne sat down.

Sterling's reaction was muted as the forecasts show the government is determined to tackle public debt but moves were limited as the chancellor seemed to suggest interest rate hikes were some way off.

The pound was up 0.21% against the dollar at $1.4789 and up 0.29% against the euro at €1.2009.

Osborne said the OBR now expects inflation to peak this year and fall back to target next year. Osborne said the agency's new forecasts are for growth of 1.2% this year and 2.3% in 2011 but 2.8% in 2012.

Last week, the office forecast growth of 1.3% for 2010 and 2.6% for 2011 rising to 2.6% in 2014.

The OBR said government debt as a percentage of GDP will be 10.1% this year but will fall to 1.1% in 2015-16, Osborne said.

The chancellor also quoted Sir Alan Budd, the head of the OBR, as saying that without today's austerity measures interest rates would have had to rise. 

Today's budget did little to allay fears about the pace of the global economy rebound as global leaders remain split about whether spending cuts or more stimulus is the best way to guarantee a sustained recovery.