After plummeting to an all-time low against the U.S. dollar in response to the outgoing chancellor’s mini-budget, the pound has rebounded as it is anticipated that on Monday, Hunt would reverse more of the giveaway measures.
The pound and UK government bond yields have recovered in expectation of an important declaration from the new chancellor tasked with resolving the aftermath of the government’s failed mini-budget.
The pound fell to an all-time low versus the dollar towards the end of September when the then-short-lived chancellor Kwasi Kwarteng revealed the largest tax cut scheme in fifty years.
Mr. Kwarteng, who was fired after only 38 days on the job, paid the price for a giveaway that undermined the government’s economic credibility on financial markets.
The mini-budget precipitated not just a decline in the value of the pound, but also an increase in borrowing costs, compelling the Bank of England to take unprecedented action (BoE).
However, the British pound and bond yields partially recovered following the prime minister’s revelation on Friday that Mr. Kwarteng had been fired and that company tax will rise to 25% from April of next year instead of remaining at 19%.
Since then, Mr. Kwarteng’s replacement, former foreign and health secretary Jeremy Hunt, has pledged to regain the confidence of the financial markets by providing a transparent explanation of the government’s tax and spending plans.
At one point on Monday, the pound climbed 1.1% to $1.1294 and made gains against the euro after the Treasury announced that Mr. Hunt would provide important elements of a medium-term plan to promote “fiscal sustainability”
The statement, posted before the opening of UK financial markets, noted that Mr. Hunt briefed the BoE governor Andrew Bailey and the head of the Debt Management Office on the intentions on Sunday evening.
A few announcements would be brought forward from the medium-term fiscal plan that is scheduled to be unveiled on October 31.
Given fresh concerns in certain sectors after the Bank of England ended its emergency gilt market assistance on Friday, the bond markets also indicated a reduction in recent pressure.
The Bank published its statement before the opening bell, stating that its actions, which were designed to assist pension funds in coping with greater collateral requirements, had enabled a “substantial rise in the sector’s resilience.”
It reaffirmed that, if necessary, other liquidity options remained open to ensure smooth financing.
Any increases in government borrowing costs, as indicated by a rise in gilt yields, would have shown greater anxiety.
“Unruly students are still plotting to remove the ailing principal”
In contrast, rates on the UK’s 20- and 30-year bonds fell by more than 30 basis points during early trading.
Susannah Streeter, the senior investing and markets analyst at Hargreaves Lansdown, stated that despite the early recovery, additional risk factors remained in play.
“The new chancellor, Jeremy Hunt, has the air of a troubleshooting teacher brought in to turn around a failing school. Today, he faces his first major presentation test with the release of an emergency budget plan intended to calm financial markets.
She added, “This is all part of his charm offensive to instill faith in the government’s fiscal responsibility, but behind him, disobedient students are still plotting to topple the ailing leader.”
Can Truss continue as PM?
It shows a growing interest in whether Ms. Truss, the author of the government’s initial economic agenda, can remain in her current position.
A Conservative lawmaker told, “The notion that the prime minister can just blame her chancellor and move on is delusional.”
“This is her perspective. She approved every aspect and defended the plan.”
In the previous three years, the Conservative Party has had five chancellors: Mr. Hunt, Mr. Kwarteng, Nadhim Zahawi, Rishi Sunak, and Sajid Javid.
