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LONDON, Nov 17 (Reuters) - Sterling and government bond prices fell on Thursday after British finance minister Jeremy Hunt announced a string of tax increases and tighter public spending in a tough budget plan.
Losses in the bond market were modest and overall, UK markets appeared relatively calm in comparison to the sharp selloff triggered by a short-lived "mini-budget" on Sept. 23.
British banking stocks rallied, while shares in the power sector came under pressure after Hunt announced a windfall tax on oil and gas firms and extended it to power generation firms.
"Today’s Autumn Statement has painted a bleak picture for the UK... Markets originally reacted well to the steady hand of Jeremy Hunt," said Marcus Brookes, chief investment officer at Quilter Investors in London.
"They will continue to give him the benefit of the doubt and see the impact of this plan, however, there is also a chance that they see this as an overcorrection and that the measures could stifle what economic growth was present."
Britain's economy is forecast to shrink next year, Hunt said. He added that Britain will bring down its government debt as a percentage of economic output within five years under a new fiscal rule.
The Office for Budget Responsibility said the new government's fiscal targets will be achieved, in a positive sign for bond investors.
Britain's 10-year gilt yield, which moves up when the price moves down, was up just 2 basis points on the day at 3.16% -- having traded at a 3.18% just before Hunt started speaking.
Two year-gilt yields were up 6 bps on the day at 3.05% , having been more than 10 bps higher earlier on.
UK money market futures pointed to the Bank of England raising interest rates to a peak of 4.57% by August next year, from 4.59% immediately prior to Hunt's remarks.
Sterling was last down 0.8% at $1.1816 from $1.1845 prior to the budget.
"In general, there had been some expectations that the axe would be wielded more dramatically by Jeremy Hunt in terms of spending cuts and it's difficult to know exactly what's moving the pound," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
"But you know there's still is concern about the long-term health of the UK economy, whether there will be enough in what the chancellor is saying for longer-term growth prospects."
Britain's blue chips inched lower to touch a session low, down 0.65% as Hunt spoke.
Shares in SSE, National Grid and Drax extended falls on the news that a windfall tax would be extended to power generators. (Reporting by the London Markets Team, Writing by Dhara Ranasinghe; editing by Amanda Cooper)
