Sophie Mellor
Mon, September 26, 2022
Since the pound sterling first went into free float in 1971, no event has sent Britain’s currency lower than the mini-budget announcement by the new chancellor of the exchequer Kwasi Kwarteng on Friday.
The pound fell 5% to an all-time low of $1.03 on Monday morning, as financial markets extended a selloff of U.K. assets following the new tax cuts unveiled by the U.K.'s recently appointed finance minister. The tax cuts are a part of new Prime Minister Liz Truss' bold new spending plans to drag the economy out of a recession as she pursues a growth rate of 2.5% in the medium term—while borrowing £45 billion ($49 billion) to do so.
After it was reported over the weekend that Kwarteng was considering more beneficial tax cuts for high earners—which Kwarteng partially confirmed—investors seem afraid that the U.K. budget will raise the country’s debt to unsustainable levels against the backdrop of a looming recession while also worsening inflation during a cost-of-living crisis and hurting Britain’s credibility to boot.
https://twitter.com/toby_n/status/1574301215889891328
The pound moderately recovered to $1.07 on Monday with markets largely expecting an emergency rate hike from the Bank of England to calm the turmoil.
https://twitter.com/EdConwaySky/status/1574329155138818051
Since 1971, the U.K. has gone through five recessions, joined and left the European Exchange Rate Mechanism, suffered through the 2008 financial crisis, Brexit, and COVID-19, and yet nothing compares to this reaction to a speech on tax policy.
Here's a look at other swings in the U.K. currency and how they differ from today.
1976 sterling crisis
Under familiar circumstances to today's pound collapse, the U.K. saw its currency drop to record low levels of $1.40 in 1976.
After Anthony Barber, the U.K. finance minister from 1970 to 1974, unveiled a "spend for growth" budget plan, the country went through a brief period of economic growth called the "Barber boom" but then ran into a wage-price spiral and super-high inflation of around 27%, culminating with a deep collapse of the currency.
Mohamed El-Erian, an adviser at Allianz, alluded to this period in a note following Kwarteng's announcement. “This is 1972, in the sense of the government going for growth and doing it via an unfunded stimulus,” he wrote, adding that Kwarteng’s measures amount to “more deregulation, more tax cuts, go for growth and let the central bank deal with the inflation problem.”
To correct the rising cost of living and to pay off the debt the government had borrowed at the start of the decade, James Callaghan, the Labour government leader who took the reigns in 1976, ended up borrowing $3.9 billion from the International Monetary Fund—the largest loan ever requested from the IMF—to maintain the value of the sterling.
1985 recession under Thatcher
The last time the pound sterling fell as low as $1.03 was in 1985, three years into the early '80s recession brought on by the 1979 energy crisis and rising inflation.
At the time, Margaret Thatcher had been in office since 1979 and similarly to Truss and Kwarteng had brought in a sweeping number of tax cuts to incentivize growth. Thatcher and her Conservative government cut the top income tax rate from 83% to 60% and the basic rate income tax from 33% to 30%.
But economists note the similarities between Kwarteng and Thatcher's growth plan end there. To pay for the tax cut, Thatcher’s government raised the value-added tax rate from 8% to 15% in the 1979 Budget to offset the income tax reductions and make sure they were not inflationary. It also raised the national insurance employee rate from 6% to 9% by 1983, in sharp contrast with measures announced on Friday.
While the pound fell to $1.03 valuation, this had less to do with the value of the pound but rather how strong the U.S. dollar was at the time.
https://twitter.com/EdConwaySky/status/1574274790588022785
1992 Black Wednesday
On Sep. 16, 1992, the sterling collapsed and Britain was forced to withdraw from the European Exchange Rate Mechanism (ERM)—an adjustable exchange rate that linked the value of the European currencies together. The U.K. had been in the European ERM since 1990 but was forced out in less than two years as it fell out of the lower limits set by the ERM.
Part of its downfall could be attributed to billionaire investor George Soros, who believed the U.K. government would fail at its attempt to prop up the pound and accumulated a large short position on the currency. As he started to advocate for a weakening pound, other investors also began betting against the pound, which eventually led to the Black Wednesday crash.
George Soros reportedly made $1 billion in profit on this day and became known for "breaking the Bank of England."
https://twitter.com/RobinWigg/status/1574325230021103618
On Black Wednesday, the government raised interest rates twice on the same day to quell the panic in the market, which Alain Neuf, an economist and lecturer at Science Po and author of An Exchange Rate History of the United Kingdom, said had the opposite effect and panicked markets even more.
“I think the Bank of England is trying to weigh right now is whether they want to do an emergency meeting and raise rates or if they'd rather come across as calm and composed and not do that," Neuf told Fortune. “It's sort of like do something you lose and you don’t do something you lose. They’re in a very tight spot.”
2008 financial crisis
The pound dropped significantly in 2008 after Labour Prime Minister Gordon Brown told the U.K. the global credit crisis was likely to push Britain into a recession. On Oct. 22, 2008, the sterling fell by 4% to a value of $1.62
But sometimes a weakening currency through a recession can be good for a country, according to Nangle. “In textbooks, a weakening currency has the effect of making an economy’s exports cheaper and its imports more expensive, boosting the former and suppressing the latter,” Nangle writes, arguing a weaker pound could make a currency more competitive. "However, there are few signs that this textbook model applies to the UK," Nangle writes.
He notes that in the first half of 2007, the country’s current account, or net income from trade and overseas investment, was in a deficit of around 3% of the country’s gross domestic product due to the pound's poor valuation against the euro and the dollar. “This has increased the cost of imports — hurting real incomes and consumption — but exports have proven to be demand elastic rather than price elastic.”
Things may look worse this time around as independent research consultancy Pantheon Macroeconomics forecasts the current account to be in a deficit to be around 8% of GDP in 2022 and 2023.
2016 Brexit
The biggest one-day loss in the pound sterling’s history came after the U.K. voted to leave the European Union. The currency tumbled as much as 13% to $1.33 as investors took fright at Britain’s shock decision to leave the single market.
This has had long-standing effects on the pound sterling. A report published in June 2021 by the Bank of England estimated that the U.K.’s decision to leave the EU increased uncertainty and lowered the level of investment by almost 25% in 2020 and 2021.
“The fact that the pound has never been able to recover to the levels traded against the euro before the Brexit referendum corresponds to the weakness of investment in this period,” Jane Foley, head of foreign exchange strategy at Rabobank, wrote in an Oped in August.
https://twitter.com/dgardner/status/1574352886993149954
But while the U.K. leaving the European Union and Kwasi Kwarteng's mini-budget announcement create short-term hits to the country's currency value, they are set against a much larger and long-term backdrop: the fall of the British empire.
“The pound is declining because we started with the Empire. In the '50s you had a lot of territories and a lot of GDP and then now we're moving towards the U.K," Naef tells Fortune, noting that the U.K's currency to the lowest its been since the dollar was created in 1792. “If the economy under territories are shrinking, well the currency is going shrink with that”
"It is a question of economic might," Naef tells Fortune.
This story was originally featured on Fortune.com
Sofia Lotto Persio
Wed, September 28, 2022
The International Monetary Fund (IMF) issued an extraordinarily critical statement of the UK’s growth plans, which largely relies on unfunded tax cuts, on Tuesday (Sept. 27). It’s the latest blow to the Trussonomics school of thought espoused by the three-week old UK government.
“We do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” an IMF spokesperson told Reuters, raising concerns about the tax cuts’ effect on inequality in the country
Prime minister Liz Truss and chancellor of the Exchequer Kwasi Kwarteng unveiled the largest tax cuts in half a century, confident that these would propel GDP growth as per the doctrine of “trickle-down economics,” which the IMF rejected in 2015. But the government did not present any forecast on how the cuts would contribute to growth, or how the ensuing losses to the public purse would be funded. This raised concerns about inflation spikes and increased public borrowing at a time of high interest rates, as well as possible cuts to public services.
As markets pummeled the pound, Kwarteng put up a silent show in front of a BBC camera crew, but rumors of an argument with Truss began to emerge. The pair reportedly disagreed on whether a statement was needed to calm the markets, with Truss insisting no reassurance was needed. Both Downing Street and the Treasury denied reports of any quarrel. A meeting between Kwarteng and City of London bankers is nonetheless scheduled for today, so the chancellor will have a chance to further explain his position—and perhaps get some feedback as well.
Kwarteng will have an opportunity to heed the ‘sIMF warning and adjust course on Nov. 23, when he’s set to present an “update on growth plan implementation,” as the Treasury calls it. This will essentially be a more official version of the mini-budget presented last week, but this time, it will feature a forecast from the Office for Budget Responsibility.
Quotable
“The nature of the UK measures will likely increase inequality. The Nov 23 budget will present an early opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners.” —An IMF spokesperson
Brief history: How did we get here?
Apr. 19: An IMF forecast warns that the UK is set for the slowest growth and most persistent inflation among all G7 countries in 2023.
Sept. 6: Liz Truss is appointed prime minister after making tax cuts a key campaign policy. She made no secret of her belief that it’s fair for rich people to gain the most from tax breaks.
Sept. 23: Kwasi Kwarteng, Truss’s chancellor of the Exchequer, presents a so-called mini-budget that reverses tax increases by his predecessor and also removes the highest bracket of the tax system, a 45% slab starting from £150,000 ($160,000). The pound begins to fall against the dollar.
Sept. 26: Several UK lenders suspend their fixed-rate mortgage products, concerned about future inflation and interest rate hikes.
Sept. 27: The IMF warns the UK to change its course.
Nov. 23: Kwarteng will present his update on the mini-budget, complete with a fiscal forecast.
Quotable
“Large unfunded tax cuts are credit negative. [They will] lead to structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure stemming from the pandemic and a decade of austerity.” —Moody’s note, quoted in Bloomberg
By the digits:
$500 billion: Losses that the UK markets have sustained since Liz Truss became prime minister.
$1.035: The value of the pound on Sept. 26, in the aftermath of Kwarteng’s mini-budget—the lowest exchange rate against the dollar ever since the pound went decimal half a century ago. It has since recovered to about $1.07 at the time of writing.
2,500: Number of UK millionaires who will benefit the most from the abolition of the highest tax break, saving over £1 billion.
Theron Mohamed
Wed, September 28, 2022
Ray Dalio.Brian Snyder/Reuters
Ray Dalio slammed UK leaders for tanking the British pound and government bonds this week.
Investors panicked about an excessive amount of UK government debt being sold, he said.
The elite investor said officials' failure to foresee the market reaction suggested "incompetence."
Ray Dalio has lambasted UK leaders for inadvertently sending the British pound to a record low against the dollar on Monday, and driving two-year government bond yields to a 14-year high of 4.3% on Tuesday.
The UK government sparked the selloff by announcing a slew of tax cuts aimed at boosting economic growth, which fanned fears of worse inflation and ballooning public debt.
Dalio, a billionaire investor and the founder of Bridgewater Associates, outlined some lessons for investors and policymakers from the nation's "fiscal blunder" in a Tuesday tweet.
"The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand," Dalio said.
Investors are dumping pounds and bonds because they're worried about the government trying to sell too much debt, he continued, adding that it was bewildering the UK authorities didn't foresee that market reaction.
"I can't understand how those who were behind this move didn't understand that," Dalio tweeted. "It suggests incompetence."
The hedge fund manager accused the UK government of acting like a developing nation by producing too much debt relative to global demand.
He also warned that other governments running fiscal deficits, and trying to finance them by selling loads of debt there isn't demand for when real interest rates are low or negative, could face the same problems as the UK.
Dalio's comments in recent weeks have been similarly gloomy. For example, he predicted long-term US inflation of roughly 4.5% to 5%, interest rates above 4.5% in the years ahead, and an estimated 20% plunge in stock prices as a result.
Greg Jensen, one of Dalio's two co-chief investors at Bridgewater, has also warned that US investors should expect stubbornly high inflation, a long and painful recession, and further declines in asset prices.
Will Daniel
Tue, September 27, 2022
Ray Dalio added his name to a growing list of critics of the U.K.’s new spending plan, unveiled last week by Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng.
The billionaire investor—who founded what is now the world’s largest hedge fund, Bridgewater Associates, in 1975—argued the plan’s aggressive tax cuts will raise the U.K. debts to an unsustainable level and cripple the pound.
“Investors and policymakers: Heed the lesson of the UK's fiscal blunder,” Dalio wrote in a Tuesday tweet. “The panic selling you are now seeing that is leading to the plunge of UK bonds, currency, and financial assets is due to the recognition that the big supply of debt that will have to be sold by the government is much too much for the demand.”
On Monday, in response to Truss' new spending plan, the U.K.’s bond market experienced the largest one-day sell-off in its history, pushing the total losses in the country's stock and bond markets since Truss' appointment as prime minister on Sept. 5 to over $500 billion. Meanwhile, the pound sank to a record low of $1.05 against the U.S. dollar on Monday morning, and although it has since risen to $1.07, the currency remains near a 40-year low vs. the dollar.
After the new Truss spending plan was announced, the U.K. Debt Management Office said that it will raise its debt issuance by 72.4 billion pounds for the current fiscal year to 234.1 billion pounds.
The new spending plan will also push the U.K.’s debt to GDP ratio to around 101%, the highest level of debt the U.K. has held since 1962, according to Deutsche Bank.
In Ray Dalio’s view, this rapid increase in debt, coupled with the lack of demand for the pound on the global stage, is a recipe for disaster.
“That makes people want to get out of the debt and currency. I can't understand how those who were behind this move didn't understand that. It suggests incompetence,” Dalio said. “Mechanistically, the U.K. government is operating like the government of an emerging country, it is producing too much debt in a currency that there is not a big world demand for.”
The investor went on to argue that this should be a teaching moment for governments around the world to not increase their debts to unsustainable levels.
“I hope, but doubt, that other policymakers who are doing similar things…will recognize that they are risking a similar outcome—and that investors will see this too,” he said.
Analysts are also worried that the U.K.’s new spending plan, which was designed to spur economic growth and help alleviate the effects of high energy prices in the short term, could end up exacerbating inflation in the U.K. overall. And consumer prices already jumped 9.9% from a year ago in August.
“The government is trying to balance support for consumers and businesses with measures that might trigger further inflation, whilst also trying to reinvigorate a stagflationary economy,” Giles Coghlan, chief market analyst at global Forex broker HYCM, told Fortune. “Such a large fiscal package could contribute to elevated prices in the medium to long term that could inflict further damage to an economy and currency that are already on their knees.”
The potential inflationary impact of the new spending plan has increased calls for the Bank of England (BoE) to dramatically hike interest rates, with some economists even calling for the U.K.’s base interest rate to move from 2.25% to as high as 6% next year.
That’s bad news for the U.K.’s homeowners. Monthly mortgage rates will increase immediately for 2 million people on tracker or variable interest rate plans if the BoE follows through with its next rate hike. And another 1.8 million homeowners with fixed-rate deals will also be forced to pay significantly higher rates next year, according to U.K. Finance.
With the U.K. facing more interest rate hikes ahead, rising government debts, a sinking pound, and a European energy crisis, Deutsche Bank’s chief economist, David Folkerts-Landau, said he now believes the country will experience a severe recession that lasts three to four quarters.
“We’re thinking in terms of a recession that will be deep and long,” he told Bloomberg on Tuesday. “It’s the price we have to pay for financial stability and for getting on the right track.”
This story was originally featured on Fortune.com
UK central bank intervenes in market to halt economic crisis
WARNING OVER UK ECONOMY
The Bank of England took emergency action Wednesday to stabilize U.K. financial markets and head off a crisis in the broader economy after the government spooked investors with a program of unfunded tax cuts, sending the pound tumbling and the cost of government debt soaring.
The central bank warned that crumbling confidence in the economy posed a “material risk to U.K. financial stability,” while the International Monetary Fund took the rare step to urge a member of the Group of Seven advanced economies to abandon its plan to cut taxes and increase borrowing to cover the cost.
The Bank of England said it would buy long-term government bonds over the next two weeks to combat a recent slide in British financial assets. The bank’s actions are focused on long-term government debt, where yields have soared in recent days, pushing up government borrowing costs.
“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,? the bank said in a statement. “This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.?
The move came five days after Prime Minister Liz Truss’ new government sparked investor concern when it unveiled an economic stimulus program that included 45 billion pounds ($48 billion) of tax cuts and no spending reductions. It also wants to spend billions to help shield homes and businesses from soaring energy prices, sparking fears of spiraling government debt and higher inflation, which is already running at a nearly 40-year high of 9.9%.
The British pound plunged to a record low against the U.S. dollar Monday following the government’s announcement, and yields on U.K. government debt soared. Yields on 10-year government bonds have risen 325% this year, making it much more expensive for the government to borrow to finance its policies.
The Bank of England’s plan to buy government debt helped stabilize the bond market, with 10-year bond yields falling to 4.235% in midday trading in London.
Yields, which measure the return buyers receive on their investment, had risen to 4.504% on Tuesday from 3.495% the day before the tax cuts were announced.
The pound traded at $1.0628 on Wednesday in London, after rallying from a record low of $1.0373 on Monday. The British currency is still down 4% since Friday, and it has fallen 20% against the dollar in the past year.
Opposition parties demanded Parliament be recalled from a two-week break to confront the economic crisis. But Truss and Treasury chief Kwasi Kwarteng stayed silent and out of sight, gambling that the economic storm will pass.
Northern Ireland Secretary Chris Heaton-Harris, one of the few government ministers on view Wednesday, said the government’s policies would “make my country richer and more prosperous.”
“I think you will find economic policy takes more than a couple of days,” he said.
On Monday, the Bank of England had refrained from an emergency interest rate hike to offset the slide in the pound but said it would be willing to raise rates if necessary.
But the bank’s next scheduled meeting is not until November, and the lack of immediate action did little to bolster the pound. The bank was able to step in immediately with bond purchases because its Financial Policy Committee has a mandate to ensure the stability of the financial system.
The British government said it has fully underwritten the central bank’s intervention on government bonds, known as gilts.
“The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated U.K. government bonds from today in order to restore orderly market conditions,” the Treasury said in a statement.
The U.K. government has resisted pressure to reverse course but says it will set out a more detailed fiscal plan and independent analysis from the Office for Budget responsibility on Nov. 23.
Kwarteng met Wednesday with executives from investment banks including Bank of America, JP Morgan, Standard Chartered an UBS in a bid to soothe markets alarmed by its economic plans.
The Treasury said Kwarteng underlined the government’s "clear commitment to fiscal discipline” and promised new measures soon to boost economic growth, including deregulation of financial services.
The economic turmoil is already having real-world effects, with British mortgage lenders pulling hundreds of offers from the market as brokers waited to see what the bank would do on rates.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the Bank of England move “smacks of a bit of panic and also of frustration that the government appears to be digging in its heels, reluctant to perform a political U-turn."
James Warrington
Wed, September 28, 2022
Bank of England forced to intervene in markets over ‘material risk’ to UK economy
IMF urges Truss to reverse top rate tax cut in rare intervention
FTSE 100 claws back losses; Pound tumbles below $1.06
Ambrose Evans-Pritchard: Liz Truss must choose between a fiscal U-turn and a housing crash
Warnings of an imminent crisis in the UK pension market forced the Bank of England into its shock £65bn intervention in bond markets today.
The Bank has been warned by investment banks and fund managers in recent days that the sharp fall in bond prices has forced pension funds to sell bonds to meet margin calls.
In turn, this forces prices down more in a self-reinforcing market spiral. Officials were warned a crash could take place as soon as today.
Bank of England Governor Andrew Bailey hopes to break the cycle by buying up bonds in an effort to halt the market fall.
The central bank has delayed plans to sell bonds and will start buying them instead to stabilise what it described as “dysfunctional markets”.
The Bank said it will initially buy up to £65bn of bonds, adding that the purchases will be carried out on “whatever scale is necessary”.
The yield on 30-year gilts tumbled as low as 4.3pc – on track for its largest drop in data going back to 1996 – following the Bank's intervention. The 10-year yield fell as low as 4.2pc.
01:49 PM
More reaction: BoE's move 'only a sticking plaster'
Bethany Payne at Janus Henderson says the Bank of England blinked first in its stand-off with the Government.
The Mexican standoff between the government on the fiscal accelerator, and the central bank on the monetary brake, was won by the Government as the Bank of England has had to blink.
The contagion risks of margin calls, caused by higher gilt yields, meant that a reflexive negative feedback loop into falling UK asset prices had become too high, risking a doom loop.
The central bank will be concerned over its appearance as being independent, and has therefore tried to walk a tightrope between today’s announcement of ‘limited period’ of long-dated gilt purchases before starting a delayed quantitative tightening schedule.
This schedule will be at a slightly higher pace so that they still make good on their promise to reduce their balance sheet by £80bn in the first year. The likelihood of the market misunderstanding this policy change though is high, and risks a potential hazardous misstep.
Today’s announcement will stem some of the tide of selling flows we were expecting this week, but is only a sticking plaster to a much wider problem.
The IMF warned the UK government overnight to ‘re-evaluate’ tax cuts, but did the Bank of England just give them the green light to continue with their plans? Certainly, the market would have benefitted more from the Government blinking first, not the other way around.
01:40 PM
Reaction: Long-term bonds vulnerable
Orla Garvey at Federated Hermes Limited says the bond market remains vulnerable despite today's intervention.
The Bank of England has surprised markets today by announcing that it will conduct temporary purchases of long-dated gilts with the purpose of stabilising market conditions.
While the sell-off in long-dated gilts and particularly in inflation-linked gilts has been extreme, this emergency action does beg the question about what was happening behind the scenes to warrant such a move.
This probably reduces the tail risk of endless stop-outs causing real yields to continue spiralling higher. But starting quantitative tightening while maintaining quantitative easing will cause confusion around tightening rates.
It also doesn’t change that fact there is a huge amount of issuance coming in the years to come, and the Bank of England won't be here to buy it.
The primary concern is that markets see this as something to be tested, and I don’t believe the bank will want to set this precedent. Overall, the measures will continue to leave long-dated gilts vulnerable.
01:27 PM
BoE to spend up to £5bn on gilts per auction
The Bank of England has released a few more details about its bond-buying programme.
The gilt purchases will initially be worth up to £5bn per auction, with the first to be carried out between 3pm and 3.30pm today.
The central bank said it's ready to purchase conventional gilts with a residual maturity of more than 20 years in the secondary market.
The Bank added the parameters of the programme will be kept under review.
01:06 PM
IFS: Don't dismiss economic orthodoxy
Paul Johnson at the IFS has hit back at comments from some Tories who have dismissed the IMF's beliefs as economic "orthodoxy".
He acknowledges it needs to be tested, but says simply dismissing it is dangerous.
12:47 PM
Chart: Pound takes another plunge
12:40 PM
Turmoil rattles global markets
While it's a particularly turbulent day in the UK, it's worth pointing out that there's turmoil across global markets at the moment.
Tom Rees rounds it up:
Stocks in Europe have slumped to their lowest level since 2020 and government borrowing costs around the world have risen sharply, as mounting recession fears and another spike in tensions between Russia and the West sparked a sell-off on global markets.
The Chinese yuan hit a record low versus the surging dollar and government borrowing costs in the US, UK and eurozone reached their highest levels in more than a decade in the latest bout of market turbulence.
Huge price moves on Wednesday forced the Bank of England to step in and address the "dysfunctional" gilts market, buying Government debt in an attempt to bring down borrowing costs.
Stocks and bonds have endured heavy losses in recent weeks as worries grow over the economic impact of aggressive central bank action to tame inflation.
Investor sentiment has also been dented this week by huge leaks in the Nord Stream 1 and 2 gas pipelines from Russia, which European leaders have blamed on sabotage.
As gloom descended again on global markets on Wednesday, the Stoxx 600 Europe – which tracks the biggest stocks in the region including the UK – slipped 1.7pc to the lowest since late 2020 after a drop on Wall Street and in Asia overnight. It is the fifth straight day of declines.
12:28 PM
Chart: Wild ride for bond yields
12:19 PM
Bond yields start rising again
Meanwhile, it's a wild for bonds as well.
The yield on 30-year gilts had tumbled as low as 4.3pc – on track for its largest drop in data going back to 1996. But it's now back on the rise at just under 4.5pc.
It's the same story for the 10-year yield, which is up from its low of just over 4pc to 4.3pc.
12:12 PM
Pound tumbles 1.5pc
After an initial spike following the Bank of England's announcement, sterling is now firmly on the back foot.
The pound tumbled as much as 1.5pc against the dollar to as low as $1.05. That's back towards the all-time low it plumbed at the beginning of the week.
12:08 PM
Markets still betting on big interest rate rises
Despite the Bank's big intervention today, markets are still betting it will have to raise interest rates sharply.
Bond yields have fallen back sharply – a welcome relief for UK borrowing costs – but the same can't be said about rate rise expectations.
Traders are betting on 1.5 percentage points of interest rate rises before the Bank's next scheduled meeting in November and think rates will peak above 6pc in 2023.
12:04 PM
Capital Economics: 2.5pc growth plan looks even more unachievable
Paul Dales, chief UK economist at Capital Economics, casts further doubt on Kwasi Kwarteng's Budget plans.
The continued fallout this morning from the Chancellor’s mini-Budget has forced the Bank of England to step in to avoid the early stages of a financial crisis.
It has postponed its plan to sell some gilts and pledged to buy as many long-term gilts as needed. Long-term gilts yields are already falling back.
But the overall sense is that the downside risks to the UK economy are growing.
The fact that it needed to be done in the first place shows that the UK markets are in a perilous position. It wouldn’t be a huge surprise if another problem in the financial markets popped up before long.
Either way, the downside risks to economic growth are growing. And the Chancellor’s 2.5pc real GDP growth target is looking even more unachievable.
11:55 AM
Reaction: Budget uncertainty remains the biggest issue
Costas Milas, professor of finance at the University of Liverpool, emails in with his take on today's developments:
It is fair to say that the International Monetary Fund's economic assessment has historically been questionable. In fact, an IMF recent report concluded that its medium-term forecasts "paint" a much better economic picture than what happens in practice.
Therefore, critics of the IMF will argue that the IMF should not give lessons to the UK government on how to run its economy.
However, the stark reality is the following: The new Chancellor’s unfunded tax cuts, presented in the mini-Budget without proper economic costings, have fuelled economic policy uncertainty which, in turn, has raised financial uncertainty.
In other words, a looming recession might turn out even deeper than currently predicted.
The Bank of England's announcement of intervening in financial markets to lower UK government bond yields is an attempt to tackle the negative impact of financial uncertainty on the UK economy.
The problem, of course, remains economic policy uncertainty triggered largely by the mini-Budget.
11:51 AM
Reaction: BoE wrongfoots markets
Jens Nærvig Pedersen at Danske Research points out that the market failed to see this one coming...
11:48 AM
FTSE recovers as bond yields plunge
The FTSE 100 has clawed back most of its heavy losses from earlier in the session after the Bank of England stepped into bond markets.
Stocks sensitive to bond yields were the biggest gainers as yields tumbled on plans to start buying up long-term bonds.
British Land, Berkeley, Segro and Land Securities were among the biggest risers, all up around 3pc as real estate companies welcomed the news.
Asset managers including Abrdn and utilities such as SSE and National Grid were also big winners.
The FTSE 100, which had tumbled as much as 2pc earlier this morning, pared losses to 0.3pc. The FTSE 250 was down 0.5pc.
11:40 AM
Bond yields poised for record plunge
Long-term UK bonds are headed for their biggest ever rally after the Bank of England said it will start buying bonds and delay its quantitative tightening programme.
The yield on 30-year gilts plummeted as much as 65 basis points to 4.34pc – the largest drop in data going back to 1996.
That wiped out an earlier decline this morning and comes after days of heavy selling amid concerns about the Government's spending plans.
11:32 AM
More reaction: BoE is floundering
Markets analyst Neil Wilson is also less than impressed...
11:31 AM
Reaction: This isn't stable equilibrium
FX analyst Viraj Patel is damning about what's unfolding in UK markets right now.
He says the Bank of England is now in a game with markets, adding: "This is not a stable equilibrium."
11:28 AM
Pound spikes - then falls again
Sterling has been on a wild ride following the Bank's announcement.
The pound initially surged by 1pc against the dollar to over $1.08. But it was unable to hold onto its gains.
That's perhaps a worrying sign for the Bank that its intervention is failing to convince markets.
11:25 AM
Treasury: We support Bank's stability plans
The Treasury has issued a response to the intervention, saying it's committed to the Bank's independence and will support its financial stability and inflation objectives:
The Bank of England, in line with its financial stability objective, carefully monitors financial markets and any potential risk to the flow of credit to the real economy, and subsequent effects on UK households and businesses.
Global financial markets have seen significant volatility in recent days. The Bank has identified a risk from recent dysfunction in gilt markets, so the Bank will temporarily carry out purchases of long-dated UK government bonds from today in order to restore orderly market conditions.
These purchases will be strictly time limited, and completed in the next two weeks. To enable the Bank to conduct this financial stability intervention, this operation has been fully indemnified by HM Treasury.
The Chancellor is committed to the Bank of England’s independence. The Government will continue to work closely with the Bank in support of its financial stability and inflation objectives.
11:21 AM
UK bonds surge after BoE intervention
UK bonds have surged after the Bank of England said it will intervene in markets.
The yield on 30-year gilts plummeted 24 basis points to 4.75pc, while the 10-year was down to 4.1pc.
11:19 AM
Bank of England steps into bond market
The Bank of England has stepped in to calm markets as it warned of 'material risk' to UK stability.
In a massive intervention this morning, the central bank said it will postpone quantitative tightening – the process of selling government bonds.
Instead, it's going to start buying up long-term bonds.
The Bank said: "Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.
"This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy."
It's not clear how big this bond-buying programme will be, but the Bank said they'll be carried out on "whatever scale is necessary".
It comes after Kwasi Kwarteng's tax-cutting Budget sparked a slump in the pound and drove up government borrowing costs.
10:40 AM
Retail stocks slide after Boohoo warning
Retail stocks slumped this morning as a profit warning from Boohoo compounded fears about a consumer spending crunch.
The online fashion site cut its guidance for the year as it warned soaring energy and food bills would stop customers from splashing out on clothes and shoes. Its shares slumped 14pc.
That fuelled losses elsewhere in the sector, with Asos sliding almost 8pc. Other retailers including Dunelm, Pets at Home, WH Smith and Next also took a hit.
Royal Mail, which is heavily exposed to online retail, tumbled 8pc.
10:27 AM
Ray Dalio: UK behaving like emerging economy
Billionaire investor Ray Dalio has taken to Twitter to air his thoughts about the UK's fiscal crisis, and they're far from flattering.
He says the Government's failure to foresee the market response to its policies "suggests incompetence", adding: "Mechanistically, the UK government is operating like the government of an emerging country."
10:18 AM
More price rises coming, warns pub boss
The boss of brewer and pub group Shepherd Neame has warned that the price of a pint is likely to keep going up as surging costs continue.
The Kent-based company revealed a sharp rebound in sales and return to profit following the impact of the pandemic.
However, chief executive Jonathan Neame said the group is still under pressure due to rising costs in its supply chain.
He told PA that beer prices are now around 10pc higher year on year but could increase further.
He said:
Further rises in price are likely to be honest.
I think it's important to stress that price inflation has not been as high as many other products, and beer, particularly ales, are still incredibly good value.
But our key concerns from a price point of view have been gas, the cost and supply of CO2 and logistics as well.
10:02 AM
Virgin Atlantic lets male pilots and crew wear skirts to 'express their true identity'
Away from the doom and gloom, here's something from Oliver Gill:
Virgin Atlantic is allowing male cabin crew and pilots to wear skirts and female counterparts to wear trousers, so staff can “express their true identity” at work.
The Sir Richard Branson-owned airline is dropping rules that require its employees to wear “gendered uniform options” in a UK-first for the aviation industry.
And the changes will not be limited to Virgin Atlantic staff. In a signal that the days of passengers being referred to as “Mr” and “Mrs” are coming to an end on flights, the carrier has changed its ticketing system to allow gender neutral markers.
Juha Jarvinen, Virgin Atlantic’s commercial chief said the airline wanted staff “to embrace their individuality and be their true selves at work”.
He added: “At Virgin Atlantic, we believe that everyone can take on the world, no matter who they are.
“We want to allow our people to wear the uniform that best suits them and how they identify and ensure our customers are addressed by their preferred pronouns.”
09:52 AM
German consumer confidence slides further
Things aren't looking great over in Germany either, where consumer confidence remains on a record downward slide amid soaring inflation and a looming winter energy crisis.
GfK's confidence gauge fell to minus 42.5 points for October, hitting a record low for the fourth month in a row, following a revised September reading of minus 36.8 points.
Rolf Buerkl, GfK consumer expert, said: "The currently very high inflation rates of almost 8pc are leading to large real income losses among consumers and thus to a significant reduction in purchasing power.
"Many households are currently being forced to spend significantly more on energy."
The leaders of Germany's 16 states will meet today to discuss additional relief measures to help tackle the energy crisis – but without Chancellor Olaf Scholz, who tested positive for Covid-19 earlier this week.
09:41 AM
Kwarteng to ask bankers not to bet against the pound
There are some intriguing details emerging about Kwasi Kwarteng's meeting with Wall Street bosses today.
Sky News reports that the Chancellor will ask Wall Street bankers not to bet against the pound after it dropped to a record low against the dollar.
That would be a pretty extraordinary request from a Government that advocates free markets...
09:26 AM
UK 30-year yield hit highest since 1998
Government borrowing costs are still surging, with the 30-year yield soaring to its highest since 1998.
It comes as the Bank of England prepares for a £5bn gilt sale. It was originally planned for mid September but pushed back due to the Queen's death.
09:17 AM
Chinese yuan crashes to record low against dollar
If it's any consolation, the economic woe isn't just being felt in Britain.
China's internationally-traded yuan has tumbled to its lowest level on record as the dollar continues to gain ground.
The domestic currency also tumbled to its lowest since the global financial crisis in 2008.
The decline has fuelled speculation that China's central bank will slow the pace of monetary policy easing to avoid adding further pressure on the yuan.
Meanwhile, there were declines across Asian markets this morning, with Japan's Nikkei closing 1.5pc lower and Hong Kong stocks sinking 3pc.
09:04 AM
UK could end up in doom loop, warns top economist
The UK economy is at risk of ending up in a "doom loop" of falling currency and rising interest rates, a top economist has warned.
Julian Jessop struck a cautious tone over the outlook, but insisted the recent market meltdown had been an overreaction.
He told Radio 4's Today programme:
I think it is correct to be concerned about the fall in the pound and the rise in long term interest rates, and there is a risk that we do end up in a doom loop of a falling currency, rising interest rates and weaker growth which obviously would undermine the agenda the new government.
But I also think that people have overreacted in the heat of the last few days.
08:54 AM
Kwarteng to meet Wall Street bosses today
Kwasi Kwarteng will have another tricky meeting on his hands today when he tries to reassure US banking bosses that the Government hasn't lost control of the economy.
The meeting will be with Wall Street firms including Bank of America, JP Morgan, Standard Chartered, Citi, UBS, Morgan Stanley and Bloomberg.
It comes after the Chancellor spoke to City chiefs yesterday and doubled down on his tax-cutting fiscal plans. He's due to unveil more details about reforms to financial regulations next month.
08:41 AM
FTSE risers and fallers
The FTSE 100 has slumped sharply at the open as the outlook for the UK continues to darken.
The blue-chip index tumbled more than 2pc, with sentiment dented by interventions from the IMF and Moody's.
Energy and mining stocks were the biggest drag on the index, as a strengthening dollar weighed on metal prices and Hurricane Ian sparked further oil supply cuts.
Rate-sensitive banks including HSBC and Lloyds dropped more than 4pc.
There were also losses for retailers amid rising fears about consumer confidence. Burberry bucked the trend, rising 3.6pc after it named Daniel Lee as its new chief creative officer, replacing Riccardo Tisci.
The domestically-focused FTSE 250 also dropped 2.2pc, with Aston Martin tumbling 10pc amid ongoing concerns about its debt.
08:23 AM
UK economy is in a jam, pickle and stew, says Lord Rose
Lord Rose, the veteran retail executive and Tory peer, sums up the gloomy outlook with characteristic British understatement.
He told Radio 4's Today programme:
I think we're in a jam, pickle and stew. What business hates most of all is uncertainty and what we've got now is rather more of uncertainty.
I think we do not have the full picture. Businesses like to see the full runway.
Lord Rose added that it was "not necessary" to cut the top rate of tax "at this particular time"
08:16 AM
Shop price inflation hits record high
In a further sign of the doom this morning, food inflation hit a record high even before the slump in the pound, as businesses grappled with soaring costs and cuts to household spending.
Laura Onita reports:
Retail prices rose by 5.7pc during the first week of September, according to the BRC-NielsenIQ data, the highest rate of inflation since 2005 and accelerating from 5.1pc inflation in August.
Food inflation also hit its highest level on record, BRC-NielsenIQ said, with shoppers now paying 10.6pc more than they were a year ago.
Inflation of fresh produce accelerated strongly in September to reach 12.1pc, up from 10.5pc in August.
The figures were recorded earlier this month, before the mini-Budget was unveiled by Chancellor Kwasi Kwarteng and the pound crashed to an all-time low against the dollar. Sterling has dropped by 5pc against the US currency in the last week. City analysts think the drop could push retail inflation as high as 15pc.
Helen Dickinson, the BRC’s chief executive, said: “The war in Ukraine continued to drive up the price of animal feed, fertiliser and vegetable oil, causing fresh food inflation to rise significantly over the past few months, particularly for products such as margarine.”
08:07 AM
UK companies face highest borrowing costs on record
It's not just the Government facing sky-high borrowing costs – the crisis is hitting British companies too.
UK blue-chip companies are now facing their highest bond refinancing costs on record as Liz Truss's tax-cutting package wreaks havoc on the markets.
The difference in the rate investment-grade companies need to pay if they issue sterling bonds now compared to coupons on existing debt climbed to 325 points, according to Bloomberg data.
That's the highest level since the index began more than two decades ago, usurping the previous high hit in the aftermath of the 2008 financial crisis.
The jump means companies would have t pay an additional £3.25m annually for every £100m they borrow. It comes at a time when margins are already being eroded by soaring energy costs and supply chain troubles.
08:01 AM
FTSE 100 slumps at the open
The FTSE 100 has fallen sharply at the open amid renewed pessimism about the Government's tax-cutting economic policy.
The blue-chip index dropped 0.8pc to 6,927 points.
07:54 AM
IMF 'coming from errors of past', says Tory MP
While international bodies sound the alarm over UK policy, there's a dissenting view from Sir John Redwood.
The Tory MP told Radio 4's Today programme:
The IMF are coming from the errors of the past which they share with the world's leading central banks.
They didn't foresee the big inflation which they triggered, they didn't have sensible advice in good time to see off the inflation and now late in the day when the inflation is very visible for all to see they are suggesting taking measures to tackle it when the world has moved on and they should now be warning the world about the coming recession, which is in danger of digging in in many major countries because of the policies being followed and will be the enemy of the future.
I don't think the British Government should say anything to the IMF. I don't think we want a spat or a dialogue between the British government and the IMF.
The other thing I think the IMF and other commentators would be wise to do is judge the whole policy, because so far we have seen some tax proposals, we have not yet seen a series of supply measures which will clearly be needed at the same time as tax packages to make sure there is more investment and more growth in the economy.
07:45 AM
IMF intervention is rare, says former deputy chief
Adnan Mazarei, former deputy director of the IMF, says it's very rare for the world's lender of last resort to intervene in a developed country's economic policy.
He told Radio 4's Today programme:
The IMF doesn't make such strong statements about G7 countries. These statements are common with regard to emerging market countries with regard to the problematic policies but not often about G7 countries.
I think they are worried that the tax cuts are permanent. They are afraid that the Budget financing needs will go up, and they are requiring more borrowing domestically... inflation rising requiring interest rate rises by the Bank of England and there being a policy conflict between the Treasury and the Bank of England at the same time the UK is running a large current account deficit and relies on foreign financing.
When public sector borrowing requirements go up in order to be able to finance them against a background of inflation, the Bank of England will have to raise interest rates, but of course if it raises interest rates it has the feedback effect on the cost of borrowing for the government and so forth and so forth.
But the key issue now is that there is also a sense of problems in the country's economic management and their ability to handle issues which could lead to problems with inflation and financial market difficulties, for example we have seen problems in the mortgage market which will hurt the UK household.
07:39 AM
What did the IMF say?
This morning's fall in the pound has been sparked mainly by a hugely unusual intervention by the IMF. Here's some more detail:
The International Monetary Fund has urged Liz Truss to reverse the decision to abolish the top rate of income tax, in a highly unusual attack on the economic policy of a G7 country.
The world’s lender of last resort heaped pressure on Ms Truss and the Chancellor, as it urged Kwasi Kwarteng to use his fiscal plan in November to change course.
The IMF said it was “closely monitoring recent economic developments in the UK and are engaged with the authorities" and warned that the fiscal stimulus risked undermining the Bank of England’s efforts to curb inflation.
A spokesman for the Washington DC-based organisation said Mr Kwarteng's announcement in November would “present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high-income earners”.
It is an extremely rare intervention by the IMF over a developed country’s economic policy.
Read the full story: IMF urges Truss to reverse top rate tax cut in rare intervention
07:37 AM
Pound slips back below $1.07
After a robust recovery on Tuesday, sterling is back in the red.
The pound slipped back below $1.07 after a highly unusual intervention by the IMF stoked investor concerns.
While it's comfortably above the all-time low of below $1.04 hit on Monday, the pound is still languishing in historical terms and many traders are betting it will hit parity by the end of the year.
07:34 AM
Pound falls again
Good morning.
The pound has sunk back into the red after two major interventions last night reignited investor concerns about the UK's tax-cutting Budget.
In an extraordinary development, the IMF urged Prime Minister Liz Truss to reverse her economic policies – pointing particularly to the decision to scrap the higher rate of income tax.
Ratings agency Moody's also warned that the policies risked "permanently weakening the UK's debt affordability", in the strongest suggestion yet that the country is facing a credit rating downgrade.
The pound, which crashed to an all-time low against the dollar earlier this week, dipped back below $1.07.
5 things to start your day
1) IMF urges Truss to reverse top rate tax cut in rare intervention Highly unusual move by world's lender of last resort condemned by senior Tories as it adds to pressure on PM and Chancellor
2) Building societies under pressure as lending costs rocket Smaller lenders are more exposed to swings in wholesale interest rates than larger high street banks, which lend off their deposit bases.
3) Bank signals ‘significant’ response to turmoil BoE chief economist Huw Pill was speaking as long-term borrowing costs hit their highest level since 2002
4) Fears of job cuts as MailOnline and Daily Mail to merge operations It comes as the publisher attempts to forge a digital future for titles that frequently overlap and compete.
5) Christmas shopping chaos looms as Royal Mail staff plan 19 days of walkouts Union leaders have launched a significant escalation in their industrial dispute with Royal Mail, warning of severe disruption to deliveries
What happened overnight
Sterling dipped again this morning, falling nearly 1pc against to dollar to $1.0634.
Asia resumed its downwards trend, with Tokyo, Hong Kong and Seoul all down more than 2pc, while Shanghai, Sydney, Singapore, Wellington, Taipei, Manila and Jakarta were also off.
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