Jeremy Hunt arrives at his home in London after he was appointed Chancellor of the Exchequer following the resignation of Kwasi Kwarteng. Picture date: Friday October 14, 2022.
Aaron Chown | Pa Images | Getty Images
LONDON — Sterling rose against the dollar on Monday alongside government borrowing prices as U.K. Finance Minister Jeremy Hunt rolled back swathes of the government’s controversial tax-cutting plans.
The yields on long-dated U.K. government bonds, known as gilts, fell during an emergency statement delivered by Hunt.
The yield on 20-year gilts was down 42 basis points during the statement, dropping to 4.439%. 30-year index-linked gilt yields were also down 42 basis points to 4.368%. 10-year gilt yields fell 34 basis points to trade around 3.981%. Yields on 5-year and 2-year gilts also slid Monday. Yields move inversely to prices.
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The pound was up around 0.9% to $1.1259 by around midday London time, extending gains after rising for much of the morning session.
The market moves follow a dramatic day in British politics on Friday, which included big fiscal U-turns from Prime Minister Liz Truss and the sacking of Finance Minister Kwasi Kwarteng. He was swiftly replaced by Hunt, who made his emergency fiscal statement at 11 a.m. local time on Monday.
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The major U-turn included scrapping the cut in the lowest rate of income tax from 20% to 19%, as well as cuts to dividend tax rates, the reversal of off-payroll working reforms, VAT claim-backs for tourists and the freeze on alcohol duty rates.
The announcements Monday came two weeks ahead of schedule. However, the full medium-term fiscal plan is still set to be published on Oct. 31, accompanied by a forecast from the independent Office for Budget Responsibility — something that was lacking in the original mini-budget announced on Sept. 23 which roiled U.K. bond markets.
In a research note Monday morning, Kit Juckes from Société Générale said the message the U.K. government now wants to send to the markets is “nothing to see here, please go about your normal business.”
“I’m not sure it will be quite that simple, but gilt yields should fall, sterling volatility should melt away and all we’ll be left with will be recession, austerity, higher rates and a lingering sense that this sterling crisis, more than its predecessors, was homemade and avoidable,” he added.
Biden: Original plan was ‘a mistake’
The International Monetary Fund gave a damning verdict on the U.K.’s debt-funded tax cuts after they were first announced in late September. U.K. bonds saw a sharp sell-off and the pound hit a record low in the days afterward.
In a rare statement, the IMF said the plans laid out by the U.K. would “likely increase inequality” and it stressed it does “not recommend large and untargeted fiscal packages at this juncture.”
U.S. President Joe Biden weighed in on the British economy over the weekend, describing Truss’s now-abandoned tax cut plan as a “mistake” and expressing concern that other nations’ monetary policies could hurt the United States.
“I wasn’t the only one that thought it was a mistake,” Biden said. “I disagree with the policy, but that’s up to Great Britain.”
Biden also said it was “predictable” that Truss had to backtrack the plans. He spoke to reporters at an ice cream shop in Oregon on Saturday.
Pressure on Truss
On Friday, Truss announced a partial reversal of her so-called mini-budget, including the scrapping of a pledge to reverse a corporation tax hike. Corporation tax will now increase from 19% to 25% as originally planned by her predecessor Boris Johnson’s government.
Markets weren’t reassured by the move though, and the pound fell by around 1.1% against the dollar following Truss’s speech, trading at around $1.1205. Many political observers highlighted her poor performance Friday, piling yet more pressure on Truss with some lawmakers calling for her to step down, including members of her own party and leader of the opposition party, Keir Starmer.
