Pound rises as Jeremy Hunt scraps mini-budget tax cuts
The pound (GBPUSD=X) rose on Monday as Britain's new chancellor of the exchequer Jeremy Hunt announced a complete U-turn on the tax and spending measures announced in the mini-budget.
Sterling gained 2.1% against the dollar to $1.14 after Hunt unveiled his fiscal plans in an attempt to turn around a loss of confidence in the government's fiscal plans. It jumped 1.3% against the euro to €1.16.
He said that he will reverse almost all the tax cuts announced in the mini-budget, in a move set to raise £32bn annually. He said that he would shelve the income tax cut indefinitely, as well as the tourist VAT move and the cuts to dividend tax.
Read more: Jeremy Hunt bins disastrous mini-budget and announces changes to energy bill support
The move brought forward some announcements which had been expected on 31 October. Hunt is due to also make a statement in the House of Commons on Monday afternoon.
The Treasury earlier said that the emergency statement was designed to "ensure sustainable public finances underpin economic growth" following talks over the weekend between Hunt and prime minister Liz Truss.
Hunt, who took over from Kwasi Kwarteng after he was sacked by Truss, effectively tore up the government's previous economic strategy to cut taxes in an attempt to boost growth,
He had warned over the weekend that taxes would have to go up while spending would rise less quickly than had previously been planned.
It comes as the Bank of England confirmed that it "ceased all bond purchases on Friday 14 October".
The £65bn emergency measure, which ran from 28 September was aimed at dulling the effect of rapid sales related to pension schemes.
Around £19.3bn worth of gilts were purchased in total by the central bank through the programme.
"The purpose of the operations was to provide time for LDI funds to address risks to their resilience from volatility in the gilt market, not to provide a permanent backstop... As intended, these operations have enabled a significant increase in the resilience of the sector."
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Hunt's pushed stimulus statement has seen the cost of government jump ahead of the statement.
Yields on the 30-year and those on the 10-year bonds were down more than 8%. Yields fall when prices rise.
Dear @Jeremy_Hunt pls put in place an emergency mortgage plan for regulatory intervention that protects mortgage holders from the impact of likely sharp UK rate rises. Eg
- Loosening remortgage affordability rules
- Flexibility in terms
- Payment holidays
- Stronger forbearance
— Martin Lewis (@MartinSLewis) October 17, 2022
Economists have warned Britain is set to enter a deeper recession due to the government's tax U-turn and the mini-budget market turmoil.
Analysts at Goldman Sachs (GS) expect a more significant recession than originally forecast and a 1% contraction in gross domestic product next year, a downgrade from its previous prediction of a 0.4% drop.
But, economist Ibrahim Quadri said that U-turn will put less pressure on the Bank to aggressively tackle inflation with rapid interest rate lifts, easing the mortgage misery facing millions of households.
Truss reversed on another key pledge on Friday, announcing that corporation tax would rise to 25% from April next year, instead of keeping it at 19% as was announced by Kwarteng on 23 September.
The government had already backpedaled on plans to abolish the 45p tax rate for the highest earners.
Read more: UK house prices jump to record £371,158 despite mini-budget turmoil
Michael Hewson, chief market analyst at CMC Markets UK, said: "The big question now is whether the volatility seen in gilt markets in recent weeks settles down as we start a new week, and with the Bank of England’s gilt buying program now officially at an end.
"There is no question that recent events have shattered confidence in the UK current government, and trust once foregone is usually very difficult to get back.
"The wider question now is what happens next with respect to any new budget, and whether new chancellor Jeremy Hunt can stabilise the ship at a time when global interest rates are rising anyway."