The pound and UK government bond yields rallied ahead of a key statement from the new chancellor tasked with sorting out the fallout from the government’s disastrous mini-budget.
The pound fell to a record low against the dollar in late September after then-Chancellor Kwasi Kwarteng unveiled the biggest tax cut package in 50 years.
Mr Kwarteng, who was sacked on Friday after just 38 days on the job, paid the price for a giveaway that challenged the government’s economic credibility in financial markets.
The mini-budget not only led to a collapse in the value of the pound, but also caused borrowing costs to soar – forcing a unprecedented intervention by the Bank of England (BoE).
However, following the Prime Minister’s announcement on Friday that Mr Kwarteng had been sacked and that corporate tax would rise to 25% from April next year, instead of being held at 19%, there was a partial recovery in UK currency and bond yields.
Mr. Kwarteng’s replacement, former foreign and health secretary Jeremy Hunt, has since promised to regain the confidence of financial markets by taking full account of the government’s tax and spending plans.
The pound gained 1.1% to hit $1.1294 at one point on Monday and also made progress against the euro when the Treasury revealed that Mr Hunt would deliver key elements of a medium-term plan later Monday in support of “fiscal sustainability”.
The statement – released before the UK financial markets opened – added that Mr Hunt met BoE Governor Andrew Bailey and the head of the debt management office on Sunday evening to brief them on the plans.
There would be a few announcements selected from the medium-term budget plan which is due to be revealed on October 31.
Bond markets also suggested an easing of recent pressure, given the additional concerns that arose in some quarters after the The BoE concluded its emergency support for the gilt market on Friday. Friday.
The Bank released its own statement ahead of the opening to say its operations, aimed at helping pension funds cope with higher collateral demands, had led to a “significant increase in sector resilience”.
He recalled that other liquidity options remain available, if necessary, to ensure smooth funding.
Any increase in government borrowing costs, through a rise in government bond yields, would have reflected additional concern.
“Unruly students always plot to oust the beleaguered head”
But there was downward movement, with UK 20- and 30-year yields falling more than 30 basis points in early trading.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said other risk factors remained in play despite the initial rally.
‘New Chancellor Jeremy Hunt looks like a troubleshooter tutored to fix a failing school and faces his first big presentation test today with an emergency budget plan launched in an attempt to calm markets financial.
“It’s all part of his charm offensive to inspire confidence in the government’s ability to be fiscally responsible, but behind him, unruly students are still plotting to oust the embattled leader,” she wrote.
Can Truss stay PM?
It reflects a renewed focus on whether Ms Truss, the architect of the government’s initial economic strategy, can stay in office.
A Tory MP told Sky News: “The idea that the Prime Minister can just scapegoat his Chancellor and move on is a delusion.
“It’s her vision. She approved every detail and she stood up for it.”
The Conservative Party is now on its fifth Chancellor in the past three years – Mr Hunt, Mr Kwarteng, Nadhim Zahawi, Rishi Sunak and Sajid Javid.
CHANCELLOR SECURES SOME BREATHING SPACE
When the markets closed on Friday, after a dramatic day that saw a chancellor sacked and totemic economic policy trashed, the verdict was troubling:
A sell-off in British gilts had accelerated before, during and after the Prime Minister’s press conference, and the closing bell couldn’t ring soon enough.
After Jeremy Hunt spent the weekend signaling a dramatic change in course to reassure investors on whom confidence in the UK economy relies, the Treasury was clearly not going to take any risks on Monday morning.
This explains the pre-dawn announcement that the new chancellor would propose some reversals on Kwasi Kwarteng’s calamitous mini-budget.
The objective was to ensure a respite, a reprieve from the execution of the markets which could have, if they had continued to feel the vulnerability, aggravated the crisis and put an end to the budgetary repositioning before it began.
The need was all the more acute as it was the first Monday in a fortnight that the Bank of England did not act as a safety net in gilt markets, with its emergency intervention having been withdrawn on Friday, partly triggering the political meltdown that ended the week. .
The answer was precisely what the Treasury and Downing Street wanted to see; the first move in UK gilt yields, a measure of the effective cost of government borrowing, was down.
Yields on 10, 20 and 30-year bonds all fell as trading began in London at 8 a.m., a trend that, if it lasts by October 31, when the Office for Budget Responsibility delivers his calculation of the state of public finances, has immense political and practical implications.
Government securities markets are important not only because they express confidence in a country’s creditworthiness. Government bonds are the mechanism by which states borrow, and the less confidence there is in your plan, the more expensive it is.
And these borrowing costs are at the heart of the calculations that the Treasury and the OBR make. The UK is £2.4 billion in debt and under the Truss plans it was to take on tens of billions more to fund tax cuts.
With market confidence evaporating (and gilt yields rising), the cost of this borrowing, old and new, has risen. If yields can be lowered, the cost of borrowing will come down, cutting billions off one side of the government’s balance sheet, which in turn could reduce the need for cuts.
The next few hours and days will be decisive.