UK finance minister unveils ‘mini budget’

Britain’s Chancellor of the Exchequer Kwasi Kwarteng walks outside Downing Street in London, Britain September 23, 2022. REUTERS/Clodagh Kilcoyne

LONDON, Sept 23 (Reuters) – Britain’s Finance Minister Kwasi Kwarteng on Friday unveiled a wide range of measures to cut taxes and household and business energy bills to spur economic growth that would require a big boost loans. Read more

Yields on UK gilts rose the most in a day for more than a decade as Britain’s debt management office outlined additional issuance plans to fund planned spending, while the pound hit new highs lowest in 37 years against the dollar.

Blue chip UK stocks (.FTSE) slipped even further into the red, in line with a broader decline in the equity market.

MARKET REACTION:

EQUITIES: The FTSE 100 was last down 1.6% on the day, after trading around two-and-a-half-month lows, but not all sectors were mired in the red. Britain’s homebuilders and makers of household goods hit session highs, buoyed by the prospect of consumers receiving tax breaks.

BONDS: Two-year gilt yields rose nearly 50 basis points to 3.997%, their biggest one-day rout since late 2009.

FOREX: The British pound extended its losses, falling 1.3% on the day to around $1.10745, marking a new low in 37 years.

COMMENTS:

DAVID PAGE, HEAD OF MACRO RESEARCH, AXA INVESTMENT MANAGEMENT, LONDON:

“The market reaction is of course the most interesting. It’s clearly something that suggests a significant amount of additional gilt borrowing, but at the same time it’s fiscal stimulus at a time when the Bank of England is already worried about too high aggregate demand, and it is highly likely that it will force the Bank of England to raise rates even more than we otherwise thought.

“As for the pound, the reaction is more interesting. If you get more fiscal stimulus and less monetary stimulus, that’s something that’s buoyant for the currency. But you also have to look at the current account deficit , which is not going to shrink now.” So there is a question mark over the UK’s external position which calls into question the longer-term position of the pound.

MUBIN HAQ, CHIEF EXECUTIVE OFFICER, ABRDN FINANCIAL FAIRNESS TRUST:

“Today’s mini-budget has delivered minimal gains for those living on the margins, but maximum rewards for those with the highest incomes and significant assets. Our research shows that 4.4 million households are already experiencing serious financial difficulties and few see their chances of being able to pay their bills improve.

“Aid should have been laser-focused on those hardest hit by the cost of living crisis as the economy slips into recession.”

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON:

“The Chancellor (and new Prime Minister) appear to be betting the House on an economic rebound following his tax cuts and planning changes. But while homebuilder shareholders might cheer, the new government has led a coach and horses through the next few years of planning assumptions.

And the decision to remove the top tax rate gives Labor an easy chance in the next election, particularly when the removal of the bonus cap is also taken into account. Gilt yields are up even within minutes of the statement, showing that the government will have to pay more for its borrowing, a clear sign of market malaise.”

MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:

“It’s really this kind of rabbit out of the hat at the end, that not only will the additional rate be completely eliminated, but in addition the reductions in the basic income tax rate will be brought forward by a year. (which moved the pound). That’s quite significant.”

“The movement of the pound is a function of two things. One is less negative effects on growth prospects. People are going to have more money to spend.”

“Then there’s the fact that gilt yields are up about 20 basis points after the announcement. That’s because borrowing is going to have to go up, but it’s narrowing the gap between places like the states -United”

“However, I don’t see this as some sort of longer-term signal to go long on the pound.”

TREVOR GREETHAM, MULTI-ASSET MANAGER, ROYAL LONDON, LONDON:

“A large, unfunded fiscal stimulus package like this could be said to have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging.

“Now, with no reserve capacity, inflation at its highest level in forty years and the Bank of England trying to calm things down, we are likely to see a tug-of-war policy reminiscent of the stop-go years 1970. Investors should be prepared for a bumpy ride.

(Story corrects sterling level in paragraph 6 and removes superfluous paragraph)

London Markets Team Reports; Editing by Dhara Ranasinghe and Amanda Cooper

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