Gold and sterling rallied on Monday after Jeremy Hunt, the UK’s new chancellor, hit out at his predecessor Kwasi Kwarteng’s controversial tax cut plans in an effort to calm financial markets.
The 30-year gilt yield fell 0.41 percentage points to 4.37%, reflecting higher prices. The moves reversed most of Friday afternoon’s rise after investors decided Prime Minister Liz Truss had not gone far enough with the Kwarteng sacking and the 18 billion corporation tax cut of pounds
Thirty-year government borrowing costs remain well above the 3.75 percent level seen before last month’s £45bn of unfunded tax cuts plunged markets and triggered a liquidity crunch for UK pension funds. Short-term gilt yields also fell sharply, while the pound gained 1.3 percent against the dollar to trade at $1.1314.
In a statement on Monday, Hunt confirmed he was scrapping £32bn of those cuts and reducing energy subsidies offered in last month’s “mini” budget. The pound and UK government bonds extended their gains as he spoke.
Gilt selling had revived on Friday afternoon as the Bank of England’s emergency market intervention came to an end as the central bank bought just £19bn of a potential 65 billion in long-term bonds.
The BoE reiterated on Monday that the program had ended, but that a new short-term loan line introduced last week to help ease liquidity pressures on pension funds would continue until November 10.
Hunt’s announcement on Monday should ease pressure on the BoE to intervene more in markets, said Antoine Bouvet, rates strategist at ING.
“This is all very positive for the markets,” Bouvet said. “It’s not just the numbers, it’s the fact that he has removed the unapologetic tone and emphasized that the government is listening to the markets.”
“But ultimately you have to remember that market confidence has been shattered and it will take time to rebuild.”
The rally in bonds came as traders trimmed their bets on aggressive interest rate hikes by the BoE. In recent weeks, markets had been bracing for rates to rise above 6% in May next year, as the central bank sought to offset the inflationary implications of Kwarteng’s borrowing plans and bolster the fall in pounds Futures markets are now pricing the rate cap at just under 5.25 percent in May.
According to Investec economist Philip Shaw, Hunt’s change of tack “may have done enough to avoid a formal downgrade” of the UK’s credit rating later this week. Ratings agencies S&P and Moody’s have said the “mini” budget was negative for the country’s solvency ahead of ratings reviews scheduled for Friday.
“The new chancellor has sought to restore the credibility of UK fiscal policy and his swift intervention illustrates how seriously he is taking this,” Shaw said.
The government’s latest twist follows growing calls from Tory MPs and business figures for Truss to resign over the weekend, with a number of cabinet ministers seeking to back potential leadership candidates.
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“There is an expectation that if Truss is ousted, he will draw a line under this fiscal debacle and a new government will be able to reassure the markets and the public,” said Bank of Singapore chief economist Mansoor Mohi-uddin. the private banking branch of OCBC Bank.
But he added that the end of the BoE’s gold purchases meant that if Truss refused to resign, sterling would reverse its gains.