Image Source: Bloomberg
Pound increased, and the cost of borrowing money from the government dropped. On Monday, investors cheered Chancellor Jeremy Hunt’s announcement that most mini-budget tax measures would be reversed.
Compared to the dollar, the pound continued in an upward trajectory and was trading above $1.13 at the close of business yesterday.
In addition, as a result of the news, the yield on UK government bonds decreased, making borrowing from the government less expensive.
Analysts noted that difficult choices on government spending would still need to be made.
The government’s mini-budget update was supposed to be released on October 31, but to calm the markets, Mr. Hunt moved ahead with many billions of pounds worth of tax and spending measures.
A planned reduction in income tax will be canceled due to the revisions, and a limit on energy costs that were supposed to remain for two years will only be guaranteed until April 2019, after which it will be revisited.
The Treasury stated in a statement that the choices were made by the chancellor to ensure economic stability in the UK and to boost public confidence in the government’s commitment to fiscal restraint.
In three weeks and three days, £32 billion of unfunded tax cuts totaling £45 billion were reversed.
We could require a new language. For example, U-turn implies a deliberate action. This resembles a plane attempting to perform a handbrake turn with a jet engine.
However, it will have a significant impact, particularly the choice to focus on energy assistance after April.
As we approach a recession, there are valid concerns about more taxes and less assistance.
Since the Monday after the mini-budget, a large portion of this has been inescapable. It ought to assist in regaining economic credibility.
However, it represents such a political 180-degree turn that it is unclear if the entire cabinet, government, and Conservative party will be in favor of it.
The mini-budget went further and faster than markets anticipated, according to Prime Minister Liz Truss, who fired Kwasi Kwarteng on Friday.
The pound dropped to a new record low of $1.03, and the cost of government borrowing shot up substantially due to the mini-budget, which was blamed for the volatility in the financial markets.
However, investors did not seem to be reassured by Friday’s news of the £18 billion U-turn on corporation tax and the firing of Mr. Kwarteng, as the cost of borrowing for the UK government increased that afternoon.
On Monday, when the UK government bond market traded for the first time since the Bank of England’s emergency support program ended, there were worries of further unrest.
However, the cost of government borrowing decreased for various bonds sold on the financial markets due to the announcement of the most recent U-turn.
Markets thought Mr. Hunt would reverse tax cuts on Monday morning, and the yield on bonds with a 30-year maturity date declined, as a result, falling to 4.35%.
On September 28, after the mini-budget, it reached 5.17%.
The yield, which was 3.7% before the mini-budget, is still higher than it was.
Goldman Sachs revised its estimates for UK economic growth due to recent market volatility and changes in the government’s economic policy.
The investment bank changed its projection for the UK’s economic production in 2023 from a 0.4% decline to a 1% decline on Sunday.
In part because of much tighter financial conditions and the anticipated increase in corporation tax rates starting in April next year, Goldman predicted a more severe recession in the UK.