Closing summary
We are closing up on the business live blog, but you can follow the latest news on our main live blog with Jamie Grierson here:
The Bank of England has taken emergency action to calm turmoil in financial markets amid the collapse in the pound and the increase in government borrowing costs triggered by Kwasi Kwarteng’s mini-budget last Friday.
Threadneedle Street said it was taking urgent steps to buy long-dated UK government bonds, beginning immediately in an attempt to stabilise the market. UK pension funds have apparently come under pressure to sell bonds. The central bank’s move calmed nerves in the bond market, where yields (or interest rates) fell sharply, especially for the 30-year bond, whose yield fell to 4% from 5.5% before the announcement.
The pound tumbled as much as 1.7% before steadying somewhat, but is still 0.5% lower on the day at $1.068.
The FTSE 100 index, which had earlier fallen nearly 2% to reach 6,836, was edging higher. [Update: it later closed at 7005.39.] Other European indices are still in the red, but have pared losses, with Germany’s Dax down 0.1%, France’s CAC down 0.38% and Italy’s FTSE MiB 0.9% lower. On Wall Street, the S&P 500 has edged 0.3% higher and the Dow Jones ticked up 0.1%, while the Nasdaq is flat.
• This summary was amended on 29 September 2022, to remove an erroneous FTSE 100 figure, and to note the index’s status at close.
UK house prices are expected to drop by 10% to 15% next year, analysts and brokers predict, as mortgage providers pull deals and raise interest payments to levels not seen since before the 2008 financial crisis. A record 935 mortgage products were pulled overnight, according to Moneyfacts.
Our other main stories today:
Thank you for reading. We’ll be back tomorrow. take care! – JK
Updated
Record number of mortgages withdrawn from market
A record number of mortgages has been withdrawn from the market, as deepening turmoil in financial markets prompted more lenders to temporarily withdraw products for new customers. Some 935 products were pulled in Britain overnight, according to financial services provider Moneyfacts.
The volatility comes after the new UK government announced huge tax cuts funded by borrowing last Friday, leading to a plunge in sterling and a surge in government bond yields as concerns mounted over its ability to fund the plan.
Key points from the Bank of England announcement:
To prevent an ‘unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy’ the BoE will temporarily purchase gilts on ‘whatever scale is necessary’.
Auctions will begin today and last until 14 October. They are intended to tackle a ‘specific’ problem in the long-dated gilt market. UK pension funds have apparently come under pressure to sell bonds. The purchases will be unwound once market conditions normalise.
Although the BoE’s £80bn annual target for the reduction of its balance sheet is unchanged, it has postponed the first sales – initially planned for next week - until 31 October.
The Bank of England’s move has bought the government time to fix its credibility, says Kallum Pickering, senior economist at Berenberg, following the chancellor’s package of £45bn of unfunded tax cuts that primarily benefit the wealthy.
Gilt yields may be volatile in coming days as the BoE wrestles with market forces to stem selling pressure. But the BoE is the ultimate backer of sterling-denominated paper. Betting against its ability to fix the market disorder – at least in the short term – is futile, in our view.
But to make the situation sustainable, the government needs to fix its own problems. On 23 November Chancellor Kwasi Kwarteng will unveil more of his fiscal plans. He should recognise that the recent disorder reflects perceptions about his and his government’s credibility and take decisive steps to shore up confidence.
Short of reversing or delaying some of his tax plans, his main task will be to come up with sensible spending plans which – when factored into the OBR’s model alongside the tax cuts in the Growth Plan – show that borrowing and debt will not balloon under his watch. At that point, markets may be ready to pay more attention to the positive elements of Trussonomics such as supply-side reform and pro-growth tax adjustments.
Gas prices have risen on fears that Russia could halt supplies to Europe through Ukraine, adding to turmoil caused by damage to the Nord Stream pipelines under the Baltic Sea, reports our energy correspondent Alex Lawson.
The Kremlin-controlled gas company Gazprom said it could impose sanctions on Ukraine’s Naftogaz due to ongoing arbitration.
The statement came after the discovery of leaks on the two Nord Stream gas pipelines under the Baltic Sea near the Danish island of Bornholm in a suspected act of sabotage, although exactly by whom or why remains unconfirmed.
The pound is off the day’s lows, and is now trading 0.6% lower at $1.0667.
Mike Owens, global sales trader at Saxo Markets, says:
The Bank of England have announced they are to carry out temporary purchases of long dated UK bonds until 14th October to help alleviate current financial conditions and at the same time delay the sale of gilts until October 31st in what will then mark to the beginning of tightening. The BoE say the purpose of this is to restore orderly conditions and aimed to be very targeted based on the issues effecting UK financial markets following the ‘mini-Budget’ from the new Truss government.
This move from the Bank of England won’t stem moves against the UK debt and currency markets on their own. It’s a narrowly defined intervention that hopes to dampen the current shocks.We’re told that the Bank is meeting with the Treasury routinely week-on-week, and so now the focus will swing back to how the government plan to convince the market that their expansionist policy will provide the growth necessary to balance the UK’s finances.
Victoria Scholar, head of investment at interactive investor, says:
Although the central bank refrained from an emergency rate hike to offset the slide for sterling in FX markets, it has now intervened in the bond market. Yields dropped in response with a flattening of the yield curve and long-dated bonds rallying. The financial policy committee has a mandate to ensure the stability of the financial system which is why it has stepped in today by buying 30-year gilts.
The intervention has resulted in some respite for this week’s bond market volatility. The Bank of England has demonstrated its resolve to restore order to fixed income markets.
The monetary policy committee is expected to carry out a jumbo rate hike at the start of November but the pound remains under pressure. Despite a brief pause in the selling yesterday, the downtrend for cable continues with sterling-dollar shedding more than 20% this year.
Here’s a bit more on the meeting between Kwarteng, and the financial secretary, Andrew Griffith, with executives from the investment banking sector, as part of a series of roundtables ahead of the chancellor’s financial services deregulatory package next month.
The chancellor discussed with the bankers how last Friday’s growth plan will expand the supply side of the economy through tax incentives and reforms.
Ahead of the upcoming “Big Bang 2.0 deregulatory moment for financial services,” Kwarteng reiterated that “a strong UK economy has always depended on a strong financial services sector.”
Among the attendees were executives from Bloomberg, the London Stock Exchange, the London Metal Exchange, UBS, Bank of America, Standard Chartered, Morgan Stanley, Citi, Deutsche Bank, JP Morgan Chase & Co and Rothesay.
Ryanair has not seen any impact on flight bookings in the UK in the wake of the pound’s slide and increases in mortgage rates, but the market is likely to be challenging, according to a senior executive.
Eddie Wilson, chief executive of Ryanair DAC, the largest airline in the group, said:
We’re not currently seeing an impact, but it would be foolish not to say that if interest rates are heading up and household bills are heading up, you’re going to have less money spent.
Kwarteng tells bankers about 'clear commitment to fiscal discipline'
Kwasi Kwarteng has told investment bankers that the government is committed to fiscal discipline and that he is working closely with the Bank of England and budget forecasters. The Treasury said, referring to today’s meeting:
The chancellor underlined the government’s clear commitment to fiscal discipline and reiterated that he is working closely with the governor of the Bank of England and the OBR [Office for Budget Responsibility] ahead of delivering his medium term fiscal plan on 23 November.
Not sure this is the “urgent statement on how he is going to fix the crisis that he has made” that the Labour shadow chancellor Rachel Reeves, financial markets, and everyone else is looking for. The Labour leader, Keir Starmer, said today that 23 November is too far off.
Updated
The Bank of England has set out the details of its bond purchases, aimed at stabilising the market after the government’s mini-budget last Friday prompted a selloff.
According to Reuters, it will buy up to £5bn of bonds per day initially, and it will be purchasing bonds with a maturity of more than 20 years, but those parameters will be kept under review.
You can read the Bank’s earlier statement in full here.
Updated
Rachel Reeves, shadow chancellor of the exchequer, has responded to the Bank of England’s emergency intervention in the government bond market today.
People will be deeply worried about the cost of their mortgage, about their pensions, and about the impact this will have on their cost of living.
This is a serious situation made in Downing Street and is the direct result of the Conservative Government’s reckless actions, which include tax cuts for the richest 1%.
Their decisions will cause higher inflation and higher interest rates - and are not a credible plan for growth.
The chancellor must make an urgent statement on how he is going to fix the crisis that he has made.
The pound continues to lurch lower and is now worth $1.0549, a 1.7% drop on the day. On Monday, it hit an all-time low of $1.0327 against the dollar.
The dollar has strengthened against all major currencies and hit a 20-year high today, as it is generally regarded as a safer investment in turbulent times, and the US central bank has raised interest rates aggressively, giving investors a better return on their assets.
By comparison, the euro is down 0.38% against the dollar.
Updated
Pound tumbles 1.5% in volatile trading
Sterling has tumbled 1.5% against the dollar to $1.0571 in volatile trading, as the Bank of England’s emergency intervention in the bond market calmed nerves among gilt traders, but failed to stabilise the British currency.
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Paul Dales, chief UK economist at Capital Economics, notes that the “mini-budget resulted in 30-year gilt yields rising from 3.60% to 5.10%, which threatened financial stability by forcing pension funds to sell assets into a falling market in order to meet cash collateral requirements”.
He adds:
In response, and to prevent this from escalating into a full blown financial crisis, the Bank has done two things. First, it has postponed its plans to start selling some of its QE gilt holdings next week and will now do it on 31st October. QT via active sales is still the plan, but it will start a month later.
Second, and more significantly, it has said that it will buy an unlimited amount of long-term gilts from today as necessary to “restore orderly market conditions” until 14th October. In other words, the Bank is restarting QE, although for financial stability reasons rather than monetary policy reasons. These purchases will be temporary and will be “unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided”.
This shows that the Bank is going to do all it can to prevent a financial crisis and it is already working. Since the announcement, 30-year gilt yields have fallen back from 5.10% to 4.30%, which have reversed about half of the rise in recent days. 10-year yields have also fallen this morning from 4.55% to 4.15% and 2-year yields have dropped from 4.70% to 4.35%.
While this is welcome, 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 2.5% real GDP growth target is looking even more unachievable.
JPMorgan economist Allan Monks has sent us his thoughts on the Bank of England’s emergency intervention in the bond market.
The purpose of the Bank of England’s decision is to restore orderly market conditions and prevent an unwanted tightening in financial conditions that feeds back into the real economy. The BOE was keen to communicate its decision as a financial stability rather than a monetary policy decision, with purchases that are “temporary and targeted”. In this regard, today’s statement referred back to Monday’s statement that committed to raising rates as much as is necessary to bring inflation under control.
While the BOE’s response looks appropriate given recent developments in the gilt market, the optics are not favourable for the Bank and will inevitably prompt discussions about fiscal dominance and a monetary financing of the deficit. We think this is not entirely warranted, as the BOE has signalled it wants to exit this intervention at the first available opportunity and remains committed to undertaking sales soon after. However, the problem is whether market conditions will allow the BOE to do so on the time scale it has suggested, which in turn depend on the actions of the government.
Updated
A quick round-up of today’s main news. Here’s our story on the emergency move:
Liz Truss needs to review the budget urgently after “very serious” criticism from the International Monetary Fund and with the UK economy out of control, Keir Starmer has said.
The Labour leader said November would be too late for the government to revisit its plans, as people were “very, very worried” about the possibility of rising mortgage rates and inflation.
The rebuke from the IMF is a global embarrassment for Truss and Kwarteng, writes our economics editor Larry Elliott.
House prices in the UK are likely to fall by at least 10% next year as mortgage providers pull deals and raise interest payments to levels not seen since before the 2008 financial crisis, property experts have predicted.
Food prices in the UK have soared by a record 10.6% this month, as the war in Ukraine continues to drive the cost of staples such as margarine, pasta and tinned tomatoes to new highs.
Boohoo has issued a profit and sales warning as the cost of living crisis causes a slump in shopper demand for the fast-fashion brand’s products.
Virgin Atlantic’s crew, pilots and ground staff can now wear whichever of its uniforms they feel most comfortable in, regardless of the original male or female design of its red skirt suit or burgundy trousers.
The airline has announced a gender identity policy that lets its staff choose which of the Vivienne Westwood-designed outfits they wear to work – “no matter their gender, gender identity or gender expression”.
Updated
The Bank of England’s announcement appears to have calmed nerves in the bond and stock markets.
The yield, or interest rate, on the benchmark 10-year UK government bond has fallen further, to 4.1% (from over 4.5% before the Bank’s emergency intervention).
The two-year yield has dropped to 4.3%, while the 30-year yield is now at 4.2%, from above 5% before the announcement.
UK and European stocks have pared losses. The FTSE 100 index in London is now just 24 points lower at 6,964, a 0.3% drop. Germany’s Dax is down 0.8% (before the news, it had tumbled 2%), France’s CAC has lost 0.57% and Italy’s FTSE MiB is trading 0.85% lower.
The pound has resumed its downward path again, though, after receiving a fillip. It’s trading almost 0.5% lower at $1.0677 against the dollar, which has strengthened across the board, and hit an all-time high against China’s reminbi today.
Treasury to 'work closely' with BOE
The Treasury said the government will continue to “work closely” with the Bank of England, after the central bank announced it will launch a temporary UK government bond-buying programme as an emergency move to stave off a “material risk to UK financial stability”.
A Treasury spokesperson said:
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.
Before the Bank’s intervention, Britain sold £4.5bn of a 30-year ‘green’ government bond – but looked set to pay the highest interest rate of any government debt issued since 2008, amid the selloff in bonds in recent days.
The Debt Management Office said it will issue £4.5bn of the 2053 gilt. Bookrunners said it had been priced 1 basis point above the conventional 2052 gilt.
British 30-year government bond yields rose above 5% for the first time since 2002 today, and yielded less than 1% last December.
BOE's intervention brings some relief to markets
The Bank of England’s emergency intervention in the government bond market has brought some immediate relief to financial markets.
The yield on the 10-year benchmark gilt has fallen back to 4.37%, from above 4.5% before the announcement, thereby reducing borrowing costs (it is still much higher than before Friday’s mini-budget, when it was around 3.1%).
The pound has also pared losses, and is now almost flat against the dollar on the day at $1.0714, compared with $1.06 before the news. The UK’s stock market is trading 0.5% lower – before the intervention, it was down 1.7% – and other European stock indices have also benefited.
Naeem Aslam, chief market analyst at the trading platform Ava Trade, says:
A new era has started, markets are unstable, economic situations are dire, and the reputations of lawmakers have been shredded into pieces. This is the view among the traders who are looking at the UK’s fixed income and forex markets.
The BOE’s announcement has shown that the water has gone above their head, and they need to do whatever it takes to bring the borrowing cost down. The initial announcement has brought some relief in the UK gilt market, but the sterling has become even more volatile. Now, the anticipation is that if the current move doesn’t bring a temporary stop to the current bleed, the next step will be the un-scheduled announcement of an interest rate hike.
Updated
Bank of England intervenes in bond market
The Bank of England says it will intervene in bond markets to try and stabilise them, after the recent selloff. It will start buying long-dated gilts from today to “restore orderly market conditions” and stave off a “material risk to UK financial stability”. Here’s the full statement:
As the governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets. This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. 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. In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.
To achieve this, the Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.
On 28 September, the Bank of England’s financial policy committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace. These purchases will be strictly time limited. They are intended to tackle a specific problem in the long-dated government bond market.
Auctions will take place from today until 14 October. The purchases will be unwound in a smooth and orderly fashion once risks to market functioning are judged to have subsided. The monetary policy committee has been informed of these temporary and targeted financial stability operations.
This is in line with the Concordat governing the MPC’s engagement with the Bank’s Executive regarding balance sheet operations. As set out in the Governor’s statement on Monday, the MPC will make a full assessment of recent macroeconomic developments at its next scheduled meeting and act accordingly. The MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2% target sustainably in the medium term, in line with its remit.
The MPC’s annual target of an £80bn stock reduction is unaffected and unchanged. In light of current market conditions, the Bank’s Executive has postponed the beginning of gilt sale operations that were due to commence next week. The first gilt sale operations will take place on 31 October and proceed thereafter. The Bank will shortly publish a market notice outlining operational details.
Updated
Global stocks slide amid recession fears
Stock markets are also sliding amid recession fears. The UK’s FTSE 100 index has lost 121 points, or 1.7%, to 6,863, while Germany’s Dax has tumbled 2.1%, France’s CAC. is down 1.6%, and Italy’s FTSE MiB has lost 1.9%.
In Asia, Hong Kong’s Hang Seng closed 3.4% lower while Japan’s Nikkei lost 1.5% and the South Korean Kospi tumbled 2.45%.
Bank of America analysts said:
Indeed a recession in Europe in particular is already well anticipated, with 92% of our European fund manager survey respondents expecting one in the coming 12 months.
Good morning from Citi: "We see no near-term end to the UK’s fiscal woes. We recommend selling GBPUSD via a Put spread with strikes at 1.00/0.95 and expiry on 28 Dec 2022"
— Katie Martin (@katie_martin_fx) September 28, 2022
Updated
However, Joel Kruger, market strategist at the global financial technology firm LMAX Group, explains succinctly why the pound has plummeted.
The pound has been crushed to a fresh record low against the US dollar on the combination of monetary policy divergence between the Bank of England and Federal Reserve, along with UK specific concerns associated with tax cuts, large scale borrowing, an energy crisis, talk of no-confidence votes, and the prospect of a ratings downgrade.
The next key level to watch below comes in at parity, though at the same time, given how severely extended technical readings are right now, we believe additional downside risk should be limited in favour of a well overdue corrective bounce.
Fundamentally, we suspect such a correction could be inspired by more hawkish talk from BOE officials, softer inflation data out of the US, or a Fed that reconsiders its own hawkish stance. Look for a break back above this week’s high at 1.0930 to suggest the currency is finally ready to consider bottoming out.
The Guardian’s deputy political editor’s Jessica Elgot has tweeted about Hannan’s comments:
Only a few days since “a true blue Conservative tax cutting budget at last!” and now it’s “these trifling tax cuts are inconsequential, it’s the threat of free breakfast clubs that’s spooked the markets” https://t.co/6YbRuRco1X
— Jessica Elgot (@jessicaelgot) September 28, 2022
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Brexiteer Daniel Hannan blames fears of Labour government for market chaos
A Conservative peer and former Brexiteer has suggested the market chaos of recent days has been driven by concerns over a possible Labour government rather than the government’s own economic policy.
Daniel Hannan, one of the key Conservative voices behind the push to leave the EU, wrote an article for the ConservativeHome website playing down market concerns about the £45bn package of (unfunded) tax cuts announced by chancellor Kwasi Kwarteng.
In the piece, which was published on Wednesday and immediately widely mocked online, Lord Hannan wrote:
What we have seen since Friday is partly a market adjustment to the increased probability that Sir Keir Starmer will win in 2024 or 2025 - leading to higher taxes, higher spending, and a weaker economy.
Some pundits don’t like Truss, others have never forgiven the Tories for Brexit, yet others are horrified by the idea that growth, rather than equality, should be the Government’s priority. Fair enough. But let’s be clear-headed about what is happening.
Kwarteng’s plan has prompted unease among some Tory MPs even as the free-marketeer wing of the party has shrugged off concerns about the impact of the tax-cutting strategy.
Hannan downplayed the significance of the tax cuts in historical terms.
To blame these tiny tax reductions for the fall in the pound is akin to a fly alighting on an exhausted shire horse as it lies down to sleep, and telling itself that it wrestled the mighty beast to the ground.
He also suggested the drop in sterling reflects a “measure of surprise” that interest rates have not risen faster.
Don’t pretend that higher interest rates represent a failure of Trussonomics. They are precisely what the premier (and her chancellor) want to happen.
it’s certainly a take pic.twitter.com/2WnR0SEZbT
— Jim Pickard (@PickardJE) September 28, 2022
Updated
There are no signs that the government is backtracking on any of Friday’s £45bn (unfunded) tax cuts, reports Ben Riley-Smith, political editor at the Daily Telegraph.
Our readout of the Chancellor’s MPs call last night over here. In short: No sign of backtracking on any of Friday’s package (inc tax top rate). https://t.co/leC6ACtrih
— Ben Riley-Smith (@benrileysmith) September 28, 2022
UK government bond yields hit fresh 14-year highs
Meanwhile, UK government bond yields have surged further, increasing government borrowing costs, following the International Monetary Fund’s stinging rebuke of Liz Truss’s government’s fiscal plan.
The yield, or interest rate on the benchmark 10-year gilt, rose as high as 4.558%, the highest since the financial crisis of 2008, and is now trading at 4.513%. The two-year gilt climbed to 4.67%.
The first bankers have arrived at the Treasury for their meeting with Kwasi Kwarteng.
JP Morgan’s chief executive in Europe, the Middle East and Africa, Viswas Raghavan, did not respond to questions as he walked into the building.
Bank of America’s president of international, Bernard Mensah, gave reporters a fleeting smile but ignored the shouted questions as he walked in.
Hal Cook, senior investment analyst at Hargreaves Lansdown, has looked at bond markets.
Central banks across the globe have raised rates simultaneously and consistently, with this trend expected to continue. In the last week we have seen Sweden, the US, Norway, Switzerland, South Africa and the UK raise rates. Forward guidance from many central banks is for this trend to continue.
The major exception is Japan which on Thursday announced no change to their current -0.1% rate. This was met with a fall in the value of the Yen such that the government stepped in to try and support it via selling down some of its US Dollar reserves. They haven’t acted in this way since the 1990s.
Rate rises have caused significant capital falls in the value of bonds in 2022, with resulting rises in yields. 10-year government bonds for the US, UK and Germany were 1.5%, 1.0% and -0.1% respectively at the start of 2022. They are 4.0%, 4.5% and 2.3% today.
The Bank of England’s deputy governor for financial stability, Jon Cunliffe, has given a speech in the City of London this morning, in which he gave no update about Threadneedle Street’s response to the meltdown in currency and gilt markets, which prompted the International Monetary Fund to issue a stinging rebuke last night.
Cunliffe was giving a speech on innovations in financial trading systems at a conference held by the Association for Financial Markets in Europe. Rather than a planned Q&A, he also told those gathered: “If you’ll excuse me, I have to get back to the ranch”
Updated
Kwarteng to ask bankers not to bet against pound – report
Over here, chancellor Kwasi Kwarteng is due to meet bankers again today in an effort to calm nerves after his mini-budget sent the pound plummeting and government borrowing costs soaring.
Sky News reports that he will ask financiers not to bet against the pound, which hit a record low against the dollar on Monday.
He is also expected to underline his commitment to fiscal discipline and will talk about a “Big Bang 2.0 event” from his growth plan – deregulation aimed at the City.
However, the Treasury denied that the chancellor will be asking bankers not to short the pound.
Updated
China's reminbi hits record low against dollar
Sterling, currently down almost 0.4% at $1.0690 against the dollar, isn’t the only currency to have slumped against the surging US dollar. China’s renminbi has fallen to fresh record lows, since data first became available in 2011.
The dollar continues to rise in value against other major currencies, after the US central bank hiked interest rates again aggressively earlier this month, and as recession fears spook markets. The greenback is seen as a safer investment in times of trouble.
Economist warns of potential 'doom loop'
Julian Jessop, economics fellow at the Institute of Economic Affairs, a free market thinktank which is highly regarded by Liz Truss, has warned that Britain’s economy could end up in a “doom loop” of falling currency and rising interest rates, but also insisted that recent market moves had been an over reaction. He told radio 4:
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 of the new government.
But I also think that people have overreacted in the last few days in particular. If we step back a bit, actually almost all that the new government has done has been very positive and actually the sort of thing I would expect the IMF to welcome.
He pointed to the energy price freeze and the cancellation of tax increases (national insurance and corporation tax), adding:
On top of that is the supply side agenda. The key here is to get productivity up.
Jessop denied that a U-turn on measures like the scrapping of the top 45p income tax rate is a good way to restore confidence.
It’s only a few billion.
It’s not obvious to me that a U-turn on something like this would be positive for confidence. There are better ways to restore confidence. The government has made a start there, confirming that there will be another full fiscal statement in November with the OBR forecast that people are looking for.
Currency markets at least seem to be settling down. I’m more concerned about the rise in long-term government bond yields than I’m about the pound. The fall in the pound is still primarily more of a dollar story… But the rise in long-term interest rates, if sustained, and I hope and expect it won’t be, that could be far more damaging for the economy because that’s not just the government’s cost of borrowing, it also affects mortgages and corporate debt and everything else as well.
Bridgewater founder: 'excessive borrowing not sustainable'
Ray Dalio, a billionaire veteran investor and founder of Bridgewater, the world’s largest hedge fund, has explained why gilts and sterling have sold off, and expressed concern about the government’s understanding of the situation. He agrees with the IMF that the tax cuts were a mistake, and says that “excessive borrowing” is unsustainable.
The UK is running a large deficit which means it has to sell a lot of bonds and it’s running a current account deficit, which means it has to bring that money from abroad. And when you have more bonds to sell than the market wants to buy there’s a limitation and as a result there is a selloff. And that selloff is both a decline in bonds which raises interest rates and also a decline in sterling. This has been something that has happened a number of times in the UK, at real historic moments, and I would think that there would be an understanding of the mechanics of that by the government and that’s why it’s concerning…
I can’t imagine that this is intended and if it’s not intended, then it’s an understanding question.
You have to have real interest rates rise, you have to have interest rates rise higher than inflation. Past evaluations such as the 1992 ERM realignment is such that you would know that high enough interest rates don’t rectify the problem. It’s a basic thing. You can’t spend more than you earn without creating debt. And when that debt does not have a high enough return to compensate for inflation you’re going to have this kind of imbalance.
Asked about the government’s planned ‘dash for growth,’ he says:
That doesn’t make any sense. You can’t make wealth by running large deficits, you have to have lenders who want to own the debt and still it becomes a debt that is a burden. It doesn’t stimulate the economy, productivity is what stimulates the economy over the long run.
The IMF says the tax cuts were a mistake, and Dalio agrees.
Yes, it’s a mistake because it’s [sterling] not a major reserve currency and you need foreign money. You can’t do this without its consequences and yes it undermines the desirability of owning that. There’s a big dependence on foreign investment. Think about the losses that have come from the decline of sterling. It produces losses for foreign investors. And so it discourages foreign investors when that foreign investment is needed.
The imbalance could be corrected if “there is enough of a depreciation in the exchange rate and rise in interest rates” but this comes at a cost, he says.
That makes everything very cheap it means imported inflation goes up.
It corrects painfully the imbalance that’s produced by excessive borrowing. It’s not sustainable, it doesn’t raise living standards.
It leaves scars in the minds of those who invest in the UK.
Updated
You can read more of Starmer’s comments on our politics live blog, with Andrew Sparrow.
Starmer is now on BBC radio 4’s Today programme, talking about the IMF criticism of the UK’s tax cuts, a rare intervention by the Washington-based fund, and the market turmoil.
It reflects the fact that the government has completely lost control of the economy.
This is a government that has lost control of the economy and for what? To give tax breaks to those earning hundreds of thousands of pounds whilst working people have to pay more in prices. It’s the worst of all situations for our country to find itself in.
Starmer: November statement 'far too long off' to review tax cuts
Sir Keir Starmer, the Labour leader, said his own variable rate mortgage has gone up by a few hundred pounds. He told LBC radio this morning:
So many people with mortgages will be really worried by what’s going on because they know what this means for their their budgets - prices are going up.
We all look at the graph and we see the pound falling, but it’s not an abstract graph. This is reflected in people’s mortgages, etc. And people are very, very worried this morning.
He said the government has got to set out “how are they going to fix the problems that they have made”, with the November statement [on 23 November] “far too long off” to review the situation.
He also said his party was more united and confident than it had been in years and people at the Labour conference in Liverpool “can feel something in the air”.
And what they’re feeling in the air, I think, is change - because obviously, the government we’ve got has made an absolute mess of the economy and here you’ve got a Labour Party calmly, carefully and with confidence, setting out alternative plans for our economy and for our public services.
UK house prices could fall 10% to 15%, warn analysts and brokers
Ray Boulger, from the mortgage broker John Charcol, has predicted a 10% fall in UK house prices next year, while analysts have warned prices could drop as much as 15%.
Boulger says the gilt market meltdown, and the risk of interest rates rising to 6% by next summer “makes it very difficult to know where to price mortgage products”. This will undoubtedly have an impact on the housing market. He told BBC radio 4’s Today programme:
We can expect to see a significant fall in house prices, perhaps 10% next year.
Whilst at the moment I don’t think we’re going to see many more forced sellers… it’s certainly going to have an effect on people’s ability to buy.
Analysts at Credit Suisse are warning that higher interest rates, rising inflation and the risk of recession could lead to house prices falling by between 10% and 15%. Andrew Wishart, senior property economist at Capital Economics, has also warned of a similar slump.
The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable.
Hundreds of mortgage deals have been pulled by banks and building societies, including HSBC and Santander.
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Gilt yields hover at highest level since 2008 financial crisis
Kwarteng’s £45bn unfunded tax cuts, which mainly benefit the wealthy, have stoked fears of a borrowing binge and led to a government bond meltdown since Friday. The selloff has pushed up yields – the interest paid on government debt – which move in inverse relationship to prices.
The yield on the benchmark 10-year gilt, as UK government bonds are known, has retreated slightly but is hovering around 4.39%, up sharply from 3.1% before Friday’s mini-budget.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains:
[Yields] have hit the highest level since the financial crisis in 2008, which is piling pressure on mortgage holders, given gilt yields have an impact on swap rates, which guide lenders’ mortgage offers. Corporate bond yields have shot up even for investment grade companies, considered to be low risk, adding to worries that companies needing to refinance soon or borrow more to cope with rising input costs could struggle to make repayments.
To finance higher borrowing to pay for the tax cuts, an extra £72.4bn in debt sales are now planned for the current financial year alone. On top of this, the Bank of England plans to sell about £40bn of bonds over the next year to wind down its quantitative easing programme.
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Introduction: Pound slumps after IMF urges UK to reconsider tax cuts
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
In a stinging attack, the International Monetary Fund has urged Liz Truss’s government to reconsider its tax-cutting plans to prevent stoking inequality.
In rare public criticism of a leading global economy, the Washington-based fund said Kwasi Kwarteng’s mini-budget risked undermining the efforts of the Bank of England to tackle rampant inflation amid the cost of living emergency.
It said a fiscal policy announcement planned by Kwarteng for 23 November presented an “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”.
Keir Starmer, leader of the opposition Labour party, said the IMF’s criticism shows how serious the situation is. He told LBC Radio:
The IMF statement is very serious and it shows just what a mess the government have made of the economy and it’s self-inflicted, this was a step they didn’t have to take.
On the markets, sterling is on the backfoot again, slumping as much as 1% to around $1.06, while the dollar has hit a fresh 20-year high as rising global interest rates stoked recession fears. The pound fell to an all-time low of $1.0327 against the dollar on Monday morning, and had traded around $1.1300 before Friday’s mini-budget.
Seen as a safe haven, the dollar rose 0.5% against a basket of major currencies to hit a new peak of 114.7 in Asian trade. The yield on benchmark US 10-year government bonds also climbed, to 4% for the first time since 2010, peaking at 4.004%.
Moh Siong Sim, a currency strategist at Bank of Singapore, told Reuters:
It’s a combination of the spillover from the UK… where the gilt yields have gone ballistic. And that has spilled over into other developed market bond markets, so there’s a bit of a ricochet effect.
And of course… this is against the backdrop of a very determined message by the Fed to do whatever it takes to bring inflation down.
The Bank of England is likely to deliver a “significant policy response” to the UK’s tax cuts, its chief economist Huw Pill said on Tuesday afternoon. But Pill also argued that the Bank should wait until its next scheduled meeting in the first week of November (rather than through an emergency rate hike).
Truss and Kwarteng apparently disagreed over how to deal with the crash in sterling. Downing Street denied that there was a row.
However, Whitehall sources said there was talk within the civil service of an argument between the prime minister and chancellor at their meeting on Monday morning, and Sky News said Truss had been resisting Kwarteng’s suggestion that a Treasury statement was needed to calm the markets.
The Agenda
7.45am BST: France Consumer confidence for September (forecast: 80)
8.15am BST: ECB president Christine Lagarde speech
9am BST: Italy business and consumer confidence for September (forecasts: 102.1 / 95.1)
9.15am BST: Bank of England deputy governor Jon Cunliffe speech
1.30pm BST: US trade for August
3pm BST: US Pending home sales for August
3.15pm BST: US Federal Reserve chair Jay Powell speech
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