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UK finance minister Jeremy Hunt outlines budget

Britain's Chancellor of the Exchequer Jeremy Hunt walks at Downing Street in London

LONDON (Reuters) - UK finance minister Jeremy Hunt on Thursday raised taxes on higher earners and energy companies as part of his new plan to shore up Britain's finances, even as he forecast the economy will shrink next year.

Hunt's budget involves freezing income tax allowances and lowering the threshold at which people start to pay the highest rate of income tax, in order to close a 55-billion pound hole in the public finances.

Much of Hunt's budget had been widely expected, meaning markets offered a muted reaction. Sterling fell against the dollar, while UK government bond prices also eased, but remained clear of the day's lows.

MARKET REACTION:

STOCKS: The FTSE 100 was down 0.5%, while the mid-cap FTSE 250 dropped 0.2%, from a loss of 0.4% earlier in the day.

FOREX: Sterling fell 0.9% against the dollar to $1.1809 from $1.1845 prior to the budget.

MONEY MARKETS: Interest rate futures were pricing a peak in Bank of England rates of 4.54% by next August, from a peak of 4.59% prior to Hunt's speech.

COMMENTS:

SUSANNAH STREETER, SENIOR INVESTMENT AND MARKETS ANALYST AT HARGREAVES LANSDOWN, LONDON:

"In general, there had been some expectations that the axe would be wielded more dramatically by Jeremy Hunt in terms of spending cuts and it's difficult to know exactly what's moving the pound. But you know there's still is concern about the long term health of the UK economy, whether there will be enough in what the chancellor is saying for longer term growth prospects."

JOHN WOOLFITT, DIRECTOR OF TRADING AT ATLANTIC CAPITAL MARKETS, LONDON:

"There's been a few sort of notable developments, the windfall taxes which a lot of people will be very happy with, stamp duty cuts as well, the electric cars now having vehicle excise duty coming in from 2025 will be interesting.

But overall, it reads quite comfortable. We needed somebody with a steady hand and steady view to deliver a budget that does actually show an explanation as to why things are being done and what the impact will be really.

It's a budget that really sets out in the best way they can to defend maybe the lower earners or the more vulnerable in our population."

GILES COGHLAN, CHIEF MARKET ANALYST, HYCM, LONDON:

"It's not fantastic news, but it's not as bad as the previous mini-budget that had unbudgeted spending followed by a bond sell-off in panic.

This is careful financial conservatism, which is reassuring. Markets that have been expecting this for some time. The balance of borrowing and public sector spending is roughly what the markets have been expecting. So I think it probably as good as it gets."

PATRICK ARMSTRONG, CHIEF INVESTMENT OFFICER, PLURIMI WEALTH, LONDON:

"I don't think there's anything that should be too surprising. The economic outlook is poor for United Kingdom, it's got a lot of debt and the Bank of England hiking interest rate. Costs are going up as a percentage of GDP as well, so It's not a good news picture of a good strong economic outlook when you're facing a lot of debt but there's more many choices to be made, many good choices."

MARCUS BROOKES, CHIEF INVESTMENT OFFICER AT QUILTER INVESTORS, LONDON:

"Today’s Autumn Statement has painted a bleak picture for the UK... Markets originally reacted well to the steady hand of Jeremy Hunt. They will continue to give him the benefit of the doubt and see the impact of this plan, however, there is also a chance that they see this as an overcorrection and that the measures could stifle what economic growth was present. The government will be hoping that these measures are merely temporary in order to stabilise the ship ahead of an election in just two years’ time."

For investors, the UK remains somewhat of a difficult place to judge right now. We are not necessarily at the end of the train of bad news and with a prolonged recession priced in we may need to wait for a more sustained downward path of inflation."

STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL, LONDON:

"The pound is suffering as more of the budget black hole is coming from tax hikes rather than spending cuts. It will be just under half from tax hikes now whereas I think the expectation previously was more would come from spending cuts. That will hit consumer spending.

A lot of tax rises are coming from windfall taxes, allowance changes etc. It is very political, as it avoids the headlines that the government has put up headline tax rates."

MICHAEL HEWSON, CHIEF MARKETS STRATEGIST, CMC MARKETS, LONDON:

"We're still absorbing it really. They're saying: 'it's going to hurt.' Yes, it is. But until we pick through the fine print, it's hard to say."

I'm not sure that it's all necessary, but a lot of it is priced in and we have to see if it gets through the Commons."

SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE, LONDON:

"The austerity’s going to be welcome (to the Bank of England) purely because there’s going to be less support for UK consumers. But with regards to their inflation battle… they still have a way to go here.

We’re looking for a terminal (interest) rate around 4%.

In the short term we’re still looking at a break (for sterling) below $1.18 in the coming days."

(Reporting by London Markets; Compiled by Amanda Cooper, Editing by Dhara Ranasinghe)