Good morning.
The chancellor, Kwasi Kwarteng, has cut short his trip to Washington, returning to London for urgent talks in Downing Street because of widespread expectations that another massive U-turn, this time on a cut to corporation tax, is imminent. Read on for the latest developments.
A decision could be made before the markets open, so keep a close eye on the Guardian homepage for the latest. This U-turn is partly a response to the news that the bond market rallied yesterday on rumours of the change – but the Bank of England’s historic £65bn bond-buying intervention to protect pension funds comes to an end today. Investors want certainty on what’s happening next.
If this is hard to wrap your head around, don’t worry – it’s confusing. The key is to understand why the Bank made that intervention, and why its end matters so much. To make sense of all that, I spoke to Guardian economics correspondent Richard Partington about how we got here, and what might happen next. That’s after the headlines.
Five big stories
Finance | Research by the Trades Union Congress has found that bankers bonuses have doubled since the 2008 financial crash. The TUC says bonuses in the finance and the insurance sector have reached £20,000 a year on average.
Twitter | Federal authorities are investigating Elon Musk’s $44bn takeover deal with Twitter. It is not clear which authorities are investigating or what the focus of the inquiry will be.
US | A Florida jury has recommended life in prison for Nikolas Cruz, the 24-year-old responsible for the 2018 Marjory Stoneman Douglas high school shooting, the deadliest such act in US history. Cruz killed 14 students and three staff members.
Social care | The Guardian has obtained footage that reveals an 88-year-old woman with dementia was mentally and physically abused in Reigate Grange, a luxury UK care home that can cost up to £100,000 a year.
Education | A landmark court judgment has given students from migrant families in Scotland the same right to free university tuition as their peers.
In depth: ‘The government had essentially lost credibility’
In the immediate aftermath of September’s mini-budget, the pound plummeted to record lows and international investors lost faith in the ability of the government to service its debts – thus pushing up the interest rate the UK faces to borrow.
So the Bank of England stepped in. In the simplest terms, it offered to buy government bonds – known as gilts in the UK – to help calm disorderly and panicked banks and investors who faced a market with free falling prices. UK pension funds in particular were losing huge sums of money on account of the market’s sudden shift. It also gave the government time to “adjust” its plans – and it sounds like the corporation tax U-turn is being timed to coincide with it ending. So, what does this all mean? And how concerned should we be? Richard Partington helps me to break it all down.
***
Why are gilt yields rising?
“It’s all sort of a mess,” Richard begins – a great sign for the country’s future prospects (but hopefully not today’s newsletter).
There is no single thing that has caused all these problems, Richard notes: “There’s a global factor and a UK specific factor.” Since Russia’s invasion of Ukraine, inflation has been soaring. The International Monetary Fund (IMF) has predicted that global inflation will rise to 8.8% this year – a significant increase from 4.7% in 2021. This in turn has increased the cost of living across advanced economies.
“Inflation is at the highest levels in 40 years and the world’s big central banks – the Bank of England, the US Federal Reserve, the European Central Bank – are trying to tackle that by raising interest rates, and as a consequence of that you’ve seen gilt yields rising as well,” Richard explains. The idea is that raising interest rates reduces inflation by reducing spending (either because borrowing to pay things like mortgages and cars is too expensive, or because saving is better value when returns are higher). So one would expect the Bank’s course of action to raise borrowing costs for government, but not by this much …
The other, arguably far more important, factor in this mess is specific to the UK. After Kwasi Kwarteng’s mini-budget, where he unveiled the biggest tax cuts in half a century without explaining how the government would pay for them, the markets balked. “The financial markets thought that the government was going too far. It was ramping up the budget deficit to a degree which made it look as though the government is irresponsible,” Richard says.
These decisions were being made in a country that already had a large national debt, a large deficit and a weak economy. It was clear to international investors that things weren’t adding up. “They didn’t believe the claim that these tax cuts will pay for themselves or lead to stronger economic growth,” Richard says. In the eyes of most speculators, it looked as though the British government was going to be permanently running up its budget deficit.
There was no longer any real belief that Britain had a plan to balance its books and this loss in confidence is why things seem to be so much worse in the UK: “All of this has led to borrowing costs on international markets rising much more substantially than for other countries – because the government had essentially lost credibility.”
***
Why was the Bank of England buying UK bonds?
For the last decade, central banks around the world have kept interest rates close to zero and pursued a policy of quantitative easing (which is basically the fancy term for central banks electronically printing money to keep borrowing cheap for governments and households). But given rising inflation, central banks have decided it’s time to pull back on this policy, to fight inflation, and move into a period of “quantitative tightening”.
With the desire to reduce spending by the central bank, the dramatic decision to intervene in the bond market was a reluctant and temporary one to help pension funds recover from their exposure to volatile markets and prevent problems in that sector from spreading outwards to the wider financial markets. But to continue buying up government bonds indefinitely would contradict the Bank’s monetary ambition to tackle inflation.
***
What’s happening today?
Given the Bank’s desire to stop spending, it was no surprise when earlier this week, Andrew Bailey, the governor of the Bank of England (pictured above), announced in no uncertain terms that the emergency intervention would end today. He brusquely added that pension funds who were looking to sell gilts have “three days left”. The clear end date is intended to pressure pension funds to raise money and build up cash buffers, which will insulate them from future shocks.
Many in the pensions industry, including the Pensions and Lifetime Savings Association (PLSA), have said the scheme should not be ended too early. Their reasoning is that extending this intervention would give the funds more breathing room to fix the underlying problems they’re facing. However, this would harm the Bank’s credibility as it would be a U-turn on their announced policy. “Ultimately this is papering over the cracks of the real root of the problem that have caused these high yields,” Richard says.
***
Is my pension at risk?
After speaking to pension experts, Richard says that individual pensions are not under threat – and they are also guaranteed by the government’s pension protection fund. However, mortgage holders are in a far more precarious position (especially those on variable rates), because high street banks use gilt yields to price the interest rates on them. When gilt yields go up, so do mortgages. “The hope is that if the government pulls back from its unfunded tax cuts and regains its credibility in financial markets, government bond yields should fall back down,” Richard says – and along with them, the rising price of mortgages will be eased.
***
Did the BoE’s intervention work?
“There’s been a lot of worry about this cliff edge facing financial markets today,” Richard says, and things are still moving rapidly. On Thursday gilt yields decreased to 4.57%, after the Bank’s increase in buying capacity earlier in the week, and speculation that there may be further U-turns from the government around corporation tax. “We’re not out of the woods yet,” Richard cautions, “there are still lots of factors that could cause an upset in financial markets. But, as the days pass, there are gradual signs that the market situation could calm.”
Despite this, the forecast for the political climate remains stubbornly turbulent, as the blowback on Truss, Kwarteng and the Conservatives rumbles on.
What else we’ve been reading
Sport
Football | Bukayo Saka secured Arsenal a slim victory, 1-0, over Bodø/Glimt during a Europa League match. Manchester United similarly beat Omonia Nicosia 1-0 thanks to Scott McTominay’s intervention in the last 10 minutes of the game.
Football | Chelsea Women manager Emma Hayes has stepped back from her role indefinitely after an emergency hysterectomy. Hayes said in a statement that the operation was related to her “ongoing battle with endometriosis”.
Athletics | Sprinter CJ Ujah will be considered for Britain’s 4x100m relay team if he runs fast enough to qualify in his return from a 22-month doping ban, UK Athletics’s new technical director has confirmed.
The front pages
“Truss prepares new mini-budget U-turn in latest blow to authority” – that’s the Guardian print splash this morning. The Daily Mail says “PM ‘has 17 days to save her job’” – which is when the economic statement is due. The Times leads with “Tories plot Sunak and Mordaunt leadership”; meanwhile in the Telegraph, “Kwarteng insists: I’m not going anywhere”. The i sums it up pretty well: “PM plans tax cut U-turn while Kwarteng is out of the country” and the Financial Times has “Truss ready to rip up tax-cut pledge in desperate bid to save premiership”. “Tax U-turn on cards in battle to calm markets” – that’s the Express. The Metro’s front-page lead is “I am evil, I did this” about the trial of Lucy Letby. “Underhand of God” – the Sun is furious as “Blunder ref flogs Maradona ball for £3m”. The Mirror says “Our message to Qatar” – it’s about Gary Lineker vowing to talk about human rights and homophobia during the World Cup.
Something for the weekend
Our critics’ roundup of the best things to watch, read and listen to right now
TV
Russia 1985-1999: TraumaZone (BBC iPlayer)
Through an hour-long montage of ingeniously selected contemporary footage of everyday Russians, Adam Curtis builds up a picture of the era when the mask of Soviet competence slipped. It is essential viewing, which will help you grasp how what Putin now presides over is not so much a country as a toxic zone. Stuart Jeffries
Music
Bill Callahan – Reality
The 19th album from the 56-year-old singer-songwriter addresses his post-pandemic audience who are “coming out of dreams … coming back to dreams”. While he expounds on an esoteric brand of spirituality, there are limits to his contentment; there’s something particularly pointed about Everyway, with its blackly comic depiction of sailors warming their hands “in the corpse of a wild horse”. Alexis Petridis
Film
Emily
Frances O’Connor had her performing break playing Fanny in an adaptation of Jane Austen’s Mansfield Park alongside Harold Pinter. Now she has made an impressive debut as a writer and director with this study of Emily Brontë, intelligently played by Emma Mackey. Beautifully acted, lovingly shot and speculatively imagined. Peter Bradshaw
Podcast
Forbidden History
In the case of this podcast, based on the TV series of the same name, “forbidden” is an understatement. The first episode, Hitler’s Niece: Suicide Or Murder, is a murky affair that explores the life and death of Geli Raubal, who was found dead with a gunshot wound to her chest. The arguments for and against a cover-up continue. Hannah Verdier
Today in Focus
Inside Frieze – what can it tell us about art, money and power in 2022?
It showcases the art world’s most cutting-edge work including, this year, Damien Hirst burning his paintings. But the Frieze art fair is also a marketplace where the eye-watering prices are defying the looming global recession. Jonathan Jones explains why this is happening – and if the bubble is about to burst
Cartoon of the day | Nicola Jennings
The Upside
A bit of good news to remind you that the world’s not all bad
The horrors emerging from Ukraine are all too familiar. But Russia’s invasion has brought a unique sense of solidarity to a country battling to keep hold of its autonomy. Repair Together is a collective of twenty and thirtysomethings who travel out into rural Ukrainian areas to help rebuild villages that were occupied at the start of the war – coming to the aid of a largely elderly population with whom the younger volunteers ordinarily would never have engaged.
“I want to thank the volunteers. I want to fall on my knees,” said Oleksii Oleksiiovych, a 63-year-old whose home was destroyed by a tank in March, and who is being supported in the clean-up by strangers 40 years his junior.
Sign up here for a weekly roundup of The Upside, sent to you every Sunday
Bored at work?
And finally, the Guardian’s crosswords to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until Monday.
