Even though it was a fundamental element of her Tory leadership campaign, the prime minister declared she is abandoning the government’s pledge to drop the scheduled company tax increase from 19% to 25%.
To reassure investors, Liz Truss announced a U-turn on company tax and the financial markets have reacted poorly.
Even though it was a fundamental component of her Tory leadership campaign, the prime minister announced she was abandoning the government’s pledge to reduce the scheduled tax increase from 19% to 25%, as widely predicted.
Ms. Truss stated at a news conference that she had decided to maintain the increase, a decision that would add £18 billion annually to the public coffers.
But since Ms. Truss’s announcement in Downing Street, borrowing by the British government, which is crucial for projected massive sums of state spending, has grown more expensive, despite earlier favorable market mood when news of the tax U-turn began to emerge.
On Friday morning, it was already priced into the markets, as gilt yields, the interest rate payments on long-term government bonds, which are essentially state IOUs, declined and the pound climbed versus the dollar and the euro.
However, this continued to rise after Ms. Truss’s address, and by Friday at 4.30 p.m., the rate had risen to 4.8%.
Similar to 10-year gilts, 20-year gilts declined from a high of around 5% to 4.42% on Friday, before rebounding marginally to 4.62% after Ms. Truss spoke.
The yield on the benchmark 10-year government bond had also declined significantly, from 4.3% on Thursday to just around 4% on Friday. By late Friday afternoon, when the interest rate was 4.18 percent, this profit had been gone.
These gilts were acquired as part of the Bank of England’s unprecedented market intervention to avert a collapse in pensions, as the market questioned the reliability of the United Kingdom’s economic policies.
Before the Bank announced its 13-day intervention on 28 September, interest rates had increased dramatically in response to the mini-budget announcement, sparking a major sell-off. On Friday afternoon, the intervention concluded.
As the value of the pound has declined, it has also become more expensive for importers to pay for products in US dollars. Investors’ lack of confidence in the British market is reflected in the pound’s value declines.
Overall, however, the sterling buys more U.S. currency on Friday than on any other day in the previous week. Friday afternoon, £1 was equivalent to $1.12.
The markets currently anticipate that the Bank of England’s base interest rate, which governs the cost of borrowing in the United Kingdom, would be lower than what was anticipated earlier this week.
A rate of 5.25 percent is now anticipated, the lowest rate expected since the money budget and a significant decrease from the 5.75 percent that UK money markets priced on Thursday.
This cut is anticipated to reduce mortgage rates, which have progressively climbed since the mini-budget release as lenders withdrew mortgage products from the market in anticipation of a rate hike by the Bank of England.
There were 3,112 mortgage products available on the market on Friday morning, which was lower than before the mini-budget was released but more than the 10-year low of 2,258 mortgages available on October 1.
Since the mini-budget date of September 23, mortgage rates had increased considerably.
On Friday, the average interest rate on a two-year fixed mortgage was 6.47 percent, and the average interest rate on a five-year fixed mortgage was 6.29 percent. Before the mini-budget, the average rates for two- and five-year fixed-rate mortgages were 4.74 percent and 4.75 percent, respectively.
