Closing summary
What a week it’s been.
Last Friday, the UK chancellor, Kwasi Kwarteng, delivered his “growth plan” or mini-budget, heralding “a new approach for a new era” that left the Daily Mail cooing: “At last! A true Tory budget”.
However, the £45bn of unfunded tax cuts, which will probably mean much higher borrowing (and/or spending cuts), led to the pound plummeting and a selloff of UK government bonds, pushing their yields (or interest rates) to levels last seen during the financial crisis of 2008.
This meant a number of pension funds got into difficulty and might have gone under, had the Bank of England not launched an emergency intervention on Wednesday. It announced it would buy up to £65bn in longer-dated bonds until 14 October, to stabilise the market. Since then, the 10-year gilt yield has steadied around 4%. The mini-budget resulted in 30-year gilt yields rising from 3.6% to above 5% for the first time since 2002 on Wednesday, but they’ve since fallen to 3.8%.
The Bank said it bought £1.2bn of long-dated government bonds today at a daily operation designed to calm markets, compared with £1.4bn on Thursday, and well below the £5bn daily maximum it has announced.
The pound hit an all-time low of $1.0327 on Monday and has been on a rollercoaster all week. It is off its losses today and trading at $1.1107, still slightly down, while the euro has weakened 0.5% against the dollar, to $0.9761.
More than two fifths of mortgage deals have been withdrawn from the market over the last week and mortgage rates have soared, with lenders expecting the Bank of England’s base rate to go up to 6% by next summer. One young buyer was quoted a mortgage rate of 10.5%, compared with 4.5% before the mini-budget.
The City watchdog is now asking banks how they plan to step in and support struggling mortgage borrowers.
One of the reasons behind the financial market turmoil was the lack of an independent assessment of Kwarteng’s mini-budget. Normally fiscal statements are published alongside independent forecasts from the fiscal watchdog, the Office for Budget Responsibility, that explain the impact on borrowing and growth. It has emerged that the OBR had produced a draft forecast for the chancellor last week but he declined to release it.
Today, in an unusual move the prime minister, Liz Truss, joined Kwarteng in meeting with the OBS’s chair, Richard Hughes, and two other members of its budget responsibility committee to discuss the forecasts. The OBR said after the 48-minute meeting that it would deliver a forecast to the chancellor on 7 October.
However, the Treasury said it would only publish the independent forecasts on 23 November alongside the chancellor’s “medium-term” fiscal statement, despite calls for them to be published as soon as possible.
A weaker than expected recovery from the coronavirus pandemic has left the UK as the only G7 country with a smaller economy than in early 2020, according to official figures released on Friday. They are likely to further undermine the government’s tax-cutting measures, and overshadowed better-than-expected growth of 0.2% in the April to June quarter, revised from a 0.1% decline, which means the UK is not in a technical recession yet (which is defined as two quarters of contraction).
The FTSE 100 index has turned negative again, trading 0.16% lower at 6,868 while the German Dax has advanced 0.7%, France’s CAC is 0.8% ahead and Italy’s FTSE MiB has gained nearly 1% so far today.
Thank you for reading. Have a great weekend. We’ll be back on Monday. Bye! – JK
Updated
The City watchdog is asking banks how they plan to step in and support struggling mortgage borrowers, as lenders such as Virgin Money relaunch home loans at higher rates following a spate of withdrawals sparked by this week’s market meltdown.
Supervisors at the Financial Conduct Authority (FCA) have been holding talks with lenders to understand how their mortgage customers are faring and the kind of options that are on the table that would give struggling homeowners some breathing space.
Brokers estimate that about 1.9 million mortgage borrowers are due to come out of fixed-rate deals next year, raising fears that homeowners could struggle to afford higher monthly payments on new loans.
Chris Sykes, a mortgage broker at Private Finance, said rising rates would mean some customers “will have to make cutbacks” on their overall spending.
“I’ve quoted some clients on interest-only products [that are worth] three times their original mortgage payment moving forward,” he said. “I’ve quoted some clients thousands more than their current mortgage payment for a new product.”
First-time buyers with small deposits were facing interest rates upward of 6%. “It could be in some circumstances significantly more expensive than renting now,” Sykes said.
Updated
