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Pound rises and borrowing costs fall as chancellor moves to calm markets Pound rises and borrowing costs fall as chancellor moves to calm markets
(32 minutes later)
The pound rose and government borrowing costs fell on Monday, as investors welcomed the news that Chancellor Jeremy Hunt is reversing almost all tax measures set out in the mini-budget. The pound rose and government borrowing costs fell on Monday, as investors welcomed the reversal of most of the mini-budget tax measures by Chancellor Jeremy Hunt.
Sterling extended early morning gains against the dollar, and is now trading at around $1.13. Sterling extended gains against the dollar, and was trading at $1.13.
The news also saw the interest rate - or yield - on UK government bonds fall. The news also saw the interest rate - or yield - on UK government bonds fall, making government borrowing less expensive.
The move suggests financial markets have welcomed the changes to the government's plans. The move suggests financial markets have welcomed the changes.
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".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 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.
Chancellor to fast-track tax and spending measuresChancellor to fast-track tax and spending measures
Truss still in charge despite U-turns, says HuntTruss still in charge despite U-turns, says Hunt
An update to the government's plans had been scheduled for 31 October, but Mr Hunt has brought forward many billions of pounds worth of tax and spending measures. An update to the government's plans had been scheduled for 31 October, but Mr Hunt has brought forward many billions of pounds worth of tax and spending measures, in a bid to reassure the markets.
In a statement, the Treasury said the chancellor "has taken these decisions to ensure the UK's economic stability and to provide confidence in the government's commitment to fiscal discipline". Mr Hunt said the government was scrapping a plan to cut income tax. The basic rate of income tax will remain at 20p indefinitely - instead of being reduced to 19p.
The cap on energy bills is now guaranteed until April next year, but will then be reviewed.
But the planned cuts to stamp duty and National Insurance will go ahead.
In a statement, the Treasury said the chancellor had "taken these decisions to ensure the UK's economic stability and to provide confidence in the government's commitment to fiscal discipline".
Victoria Scholar, head of investment at Interactive Investor, said: "Jeremy Hunt's focus on reassuring the markets and reinstating confidence appears to have worked so far with gilt yields trading lower and sterling pushing higher."
However, she added: "Although we heard about Hunt's tax plans, spending question marks remain until the medium-term fiscal plan is announced on 31st October when the chancellor will outline how he plans to cut government spending in order to plug the multi-billion pound budget shortfall, raising concerns about the prospect of a new era of austerity."
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.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.
But on Monday morning, the cost of government borrowing fell across a range of bonds traded on the financial markets. There had been fears of more market turmoil on Monday, with the UK government bond market trading for the first time since the end of the Bank of England's emergency support programme.
However, the news of the latest U-turn led to the cost of government borrowing falling across a range of bonds traded on the financial markets.
The yield on bonds due to be repaid in 30 years' time, which dropped when markets opened on Monday morning, fell further after Mr Hunt's statement, to 4.35%.The yield on bonds due to be repaid in 30 years' time, which dropped when markets opened on Monday morning, fell further after Mr Hunt's statement, to 4.35%.
They had hit 5.17% on 28 September in the aftermath of the mini-budget when Mr Kwarteng set out one of the biggest tax cuts packages seen in decades but did not explain how they would be funded.They had hit 5.17% on 28 September in the aftermath of the mini-budget when Mr Kwarteng set out one of the biggest tax cuts packages seen in decades but did not explain how they would be funded.
However, the yield is still higher than it was before the mini-budget. It was at 3.7% on 22 September.However, the yield is still higher than it was before the mini-budget. It was at 3.7% on 22 September.
Meanwhile, the yield on bonds due to be repaid in five years' time, which underpins the cost of new five-year fixed rate mortgages, also fell to 3.86%.Meanwhile, the yield on bonds due to be repaid in five years' time, which underpins the cost of new five-year fixed rate mortgages, also fell to 3.86%.
The surprise move by Jeremy Hunt reflects concern about markets for government debt reopening this morning, without the parachute of emergency help from the Bank of England. An utterly extraordinary unBudget - perhaps the biggest U-turn in British economic history.
The Treasury, under the new chancellor, has decided it cannot wait, and there is no point in waiting to announce a series of measures, from more U-turns, to new tax rises and spending cuts. £45bn of unfunded tax cuts has in three weeks and three days seen a £32bn reversal.
Only the National Insurance cut seems safe for now, as it is nearly fully legislated. The measures, announced this morning, will be presented in the Commons this afternoon. We may need new terminology. U-turn suggests a controlled manoeuvre. This is like a plane trying to do the jet engine equivalent of a handbrake turn.
It is extraordinary that a G7 country needs to repeatedly manage the expectations of sceptical markets in this way. But it will have real impacts, especially the decision to target the energy help after April.
But the new chancellor is keen to show the markets the government knows what it needs to do to win back economic credibility, and that in political terms too, he is in control of events. There are reasonable questions now about higher taxes and less help as we enter a recession.
The response so far today showed sterling up, and government borrowing costs down. Much of this has been inevitable since the Monday after the mini-budget. It should help regain economic credibility.
But there might not be much left of the now notorious mini-budget by this afternoon. But it is such a political volte face, that one wonders if the whole Cabinet, Government and Conservative party will support it.
The new Chancellor's message will be this - there is no alternative.
Analysts welcomed the announcement from Mr Hunt but said the figures would come under close scrutiny.Analysts welcomed the announcement from Mr Hunt but said the figures would come under close scrutiny.
"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."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."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.""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.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.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."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.""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 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.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.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.
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