A new day of judgment in the financial markets is approaching in the UK.
Monday morning will be the first opportunity for investors to make a verdict on the government’s rapidly changing plans for the country’s finances. And importantly, it will be the first trading session since the central bank ended a multibillion-pound program to help bond markets through the recent turmoil.
Over the weekend, Britain’s new chief financial officer, Jeremy Hunt, attempted to reassure markets, the public and fellow members of the Conservative Party that confidence in government finances could be restored. Bank of England Governor Andrew Bailey said on Saturday that he had discussed financial sustainability and had an “exchange of views”, demonstrating renewed trust in Treasury Secretary Hunt.
On Friday, Prime Minister Liz Truss sought to end three weeks of financial turmoil caused by a bold plan announced on 23 September. The plan aims to cut tens of billions of pounds in taxes and significantly increase borrowing. The criticism of this fiscal policy at a time of high inflation and rising interest rates was swift. The pound plummeted to record lows against the dollar and bond yields soared, upending the UK mortgage market and triggering a crisis for pension funds. That led to central bank intervention.
“We need to act now to reassure the market of fiscal discipline,” Truss said on Friday when he dismissed Prime Minister Kwasi Kwarteng, who carried out the plan. She also made her U-turn on the second major tax policy. Truss said she would drop plans to block a planned increase in the corporate tax rate.
Still, the pound fell late on Friday, pushing yields on government bonds, a measure of government borrowing costs, higher. His 30-year yield on Friday closed at his 4.78%, one point higher than before the Sept. 23 release.
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
Will these trends continue on Monday? It will be the first time in two and a half weeks that a central bank will not buy government bonds as markets open to ease the liquidity crisis facing pension funds. Banks bought him over £19 billion in bonds.
How markets react will be a test of both governments’ efforts to restore calm and central banks’ efforts to restore order to bond markets. There may be volatility, but the question is whether it will return to the dysfunction that previously threatened financial stability because it is so pervasive.
Over the weekend, there were signs that the fourth prime minister, Hunt, was willing to scrap many of Truss’ previous financial plans.
report in Sunday Times Hunt said plans to lower the minimum income tax rate will be postponed for a year.
“We’re going to have to make very difficult decisions both on spending and on taxes.” Mr Hunt said in an interview with the BBC:was recorded on Saturday and aired on Sunday morning.
“It will not increase spending as much as people wanted,” he added. “Taxes won’t go down as fast as people think, and some taxes will go up.”
These plans to bring down the UK’s debt levels and have the policies fully evaluated by the independent government oversight body, the Office of Budget Responsibility, have been clearly received favorably by the Bank of England. On Saturday, Mr. Bailey indicated that things were different at the Treasury Department.
“It’s a clear message for everyone, including a clear message from the market,” he said at a conference in Washington. “I can say that there was a very clear and immediate consensus on the importance of stability and sustainability.”
Despite these encouraging words, there are still many uncertainties for investors. It is unclear how long Mr Truss can remain prime minister. Hunt’s plans for tax, spending and debt relief will not be revealed until October 31st. The UK continues to face a range of economic challenges, including high inflation and energy prices, and pressured households and businesses warning of a slowdown in consumer spending. There is also the question of the extent to which bond market functioning has improved.
Monday will only bring some answers to these questions.