October 2, 2022

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British pound plunges as markets react to British government tax cuts

British pound plunges as markets react to British government tax cuts

The new British government announced Comprehensive series of tax cuts On Friday, betting that it has found the way to economic growth despite rising inflation.

But the market verdict was quick and negative: The value of British stocks and bonds and the British pound plunged to new lows against the US dollar, not seen since 1985.

The plans will require significant increases in government borrowing and have raised expectations that Bank of England You will need to raise interest rates more aggressively to stop inflation. This will add more to the cost of these previously announced tax cuts and spending plans to protect households and businesses from the rising cost of energy.

After the new Chancellor of the Exchequer, Kwasi Quarting, announced the FTSE 100 index, the British stock index fell more than 2 percent.

But the most eye-catching market moves were in British government bonds and the British pound.

Bond yields, a measure of borrowing costs, have risen, which will make the interest the government pays on the new debt it issues more expensive. The yield on benchmark 10-year government bonds rose to the highest level since 2011. The yield on five-year bonds rose by more than half a percentage point, to 4.15 percent, a huge move in a market where daily changes are usually measured in hundreds of a point.

“It is fair to say that the gold market hated the mini-budget for the day,” Jim Levis, a bond investor at M&G Investments, said in comments via email, referring to the UK government bond market.

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“In a period that was already a weak period for government bonds thanks to global inflation and interest rate hikes by the central bank, the UK emerged as a poor performer,” he added.

The pound also fell about 2 percent against the euro on Friday and fell more than 3 percent against the US dollar, to $1.09. The British currency has lost more than 18 percent against the dollar this year, falling to its lowest level since 1985.

“Concerns about the UK’s financial position combined with recession expectations and an extremely high level of inflation are making the pound very weak,” analysts at Rabobank wrote in a note.

Mr Kwarteng outlined the government’s plan in a statement to packed parliament, promising to accelerate economic growth with a combination of tax cuts and deregulation that echoed the 1980s under Prime Minister Margaret Thatcher. But the focus on lower taxes for businesses and workers comes as the government prepares to spend £60 billion over the next six months to support energy costs for the families And the BusinessThe first phase of an expansion plan to freeze the cost of gas and electricity to consumers.

“Markets react as they please,” Mr Kwarteng said in the House of Commons on Friday. “But the growth plan will soon show that we are on the right track and guiding us toward a more prosperous future.”

Investors were He looked really worried On Britain’s financial situation before details of the new government’s plan were unveiled by Mr. Kwarteng. Britain’s budget and the balance of imports and exports make it dependent on what the former central bank governor called “the kindness of strangers” to fund economic plans.

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“The British pound is at risk,” analysts at Deutsche Bank warned, who for weeks have been concerned about investors losing confidence in Britain and unwilling to fund the current account deficit. “We are concerned that investor confidence in the UK’s external sustainability is rapidly eroding. The only thing that could prevent sterling from weakening is the Bank of England’s very aggressive walking cycle.”