Pound Rises As Chancellor Moves To Calm Markets

October 17, 2022

The pound rose and government borrowing costs fell on Monday, as investors welcomed the news that Chancellor Jeremy Hunt is to fast-track tax and spending measures.

Sterling gained 1% against the dollar to trade around $1.13 in morning trading.

The news also saw the interest rate - or yield - on UK government bonds fall.

The drop in yields suggests financial markets are welcoming the prospect of changes to economic plans.

Monday is the first time the UK government bond market has reopened since the Bank of England's emergency support programme ended on Friday.

On Friday, Prime Minister Liz Truss sacked Kwasi Kwarteng as Chancellor and said the mini-budget "went further and faster than markets were expecting".

The mini-budget was blamed for causing turmoil in the financial markets. The aftermath of Mr Kwarteng's announcements on 23 September saw the pound slump to a record low of $1.03 and the cost of government borrowing rise sharply.

"The chancellor will make a statement later today, bringing forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability," a Treasury spokesman said.

Mr Hunt is expected to fast-track many billions of pounds worth of tax and spending measures from his debt plan, announcing them a fortnight earlier than expected.

It is the latest of a series of U-turns on policies announced in the mini-budget.

The announcement of the £18bn U-turn on corporation tax on Friday and the firing of Mr Kwarteng did not appear to reassure investors, with UK government borrowing costs climbing on Friday afternoon.

Investors warned that whatever Mr Hunt announces will need to "add up".

"I think you'll see a positive reaction to the statement, assuming that the math adds up a bit more than it did before," Shanti Kelemen, chief investment officer at M&G Wealth, told the BBC.

"What we saw on Friday, was we had markets rise in in the lead up to the news the news that Kwarteng was resigning, but then as soon as it happened, we had a sell-off afterwards.

"So I think it'll be important that the actual content of what's being delivered adds up and has some more meat and numbers behind it than what we've seen previously."

The Bank of England stepped in to stabilise the financial markets following the mini-budget, announcing an emergency bond-buying scheme.

Ms Kelemen said that the latest moves from the chancellor showed he acknowledged the government's role in reassuring the markets.

"They've recognised that the uncertainty is damaging the economy," she said.

"You also see the Bank of England won't be supporting markets this week. So I think it shows the government is taking a bit more responsibility rather than relying on the Bank of England to buy all the debt."

The shift in the government's economic policies and market turmoil in recent weeks has led to Goldman Sachs downgrading its forecasts for UK economic growth.

The investment bank revised its 2023 UK economic output forecast from a 0.4% drop to a 1% contraction.

Goldman said it expected a "more significant recession in the UK" in part due to "significantly tighter financial conditions" and the planned higher corporation tax rate from next April.

Consultancy Pantheon Macroeconomics said the prime minister's decision to appoint Mr Hunt as chancellor had "done little to shrink the risk premium embedded in UK assets".

"Households and businesses, therefore, are still facing a huge increase in their borrowing costs," their analysts said.

They added the forthcoming real-terms reduction in government spending looked "set to be bigger than in the 2010s".

Source: BBC
Image source: DW

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