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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK warned ‘significant’ rate rise is coming, as calls for mini-budget U-turn rise - as it happened

Kwasi Kwarteng United States Bank of England
The Bank of England in central London.
The Bank of England in central London. Photograph: Daniel Leal/AFP/Getty Images

A late PS: the selloff in the UK bond market is continuing at a worrying pace tonight.

The yields of UK five, 10 and 30-year gilts have all surged alarmingly, as investors continue to demand a higher rate of return for holding British debt.

Summary: Rate rise coming, as opposition to mini-budget mounts

Time for a recap.

UK houseowners have been warned to expect a painful hike in interest rates by the first week in November, in response to the market mayhem caused by the Bank of England’s

The Bank of England’s chief economist warned that “significant” increases in interest rates will have to be imposed by the central bank in response to tax cuts put forward by Kwasi Kwarteng in his mini-budget.

The Bank’s chief economist, Huw Pill, said the chancellor’s planned tax cuts would act as a stimulus and increase inflationary pressures, with the result that interest rates would need to go higher than previously forecast.

He said:

“In my view, a combination of the fiscal announcements we have seen will act a stimulus to demand in the economy,”

“It is hard not to draw the conclusion that this will require a significant monetary policy response.

That implies a steep hike in Bank Rate, which is currently 2.25%.

Hundreds of mortgage deals have been removed from the markets in recent days, as brokers are unable to price them given the turbulence in the bond markets.

The next week or so will crucial in determining how the markets plays out.

Chancellor Kwasi Kwarteng has tried to reassure international investors, telling them that he has confidence in his economic plan.

“We are confident in our long-term strategy to drive economic growth through tax cuts and supply-side reform,” Kwarteng told bosses, according to a Treasury readout of the meeting.

“I’m confident that with our growth plan and the upcoming medium-term fiscal plan – with close cooperation with the Bank [of England] – our approach will work.”

UK government bonds are continuing to weaken after international investors’ confidence in Britain was hammered. The yield on long-dated 30-year bonds is the highest since before the 2008 financial crisis.

It now costs the UK more than Italy or Greece to borrow for the next five years.

More experts have warned that the government should u-turn on the tax cuts announced in Kwarteng’s £45bn giveaway.

The boss of Virgin Atlantic, Shai Weiss, said Liz Truss should take a “difficult decision” to reverse sterling’s slide, arguing:

“Sometimes all of us in this room should be humble enough to say: ‘If I did something that is not working, maybe I should reverse course.’

“That is not a bad thing to do.”

German finance minister Christian Lindner raised doubts about the British government’s plans to accelerate spending while the central bank tightens policy to rein inflation.

In another sign of rising international concern, Lindner warned:

“In the UK, a major experiment is starting as the state simultaneously puts its foot on the gas while the central bank steps on the brakes,”

And Larry Summers, a former US Treasury secretary, warned that the UK government’s ‘utterly irresponsible’ plans could drag the pound below parity against the euro, as well as the dollar.

Victoria Scholar, head of investment at Interactive Investor, says concerns that Kwarteng is acting irresponsibly are rising:

Adding to the damaging market reaction on Monday, the backlash against the mini-Budget appears to be widening amid complaints from the corporate sector as well as policymakers in the US and Europe.

The common thread that ties together the slew of grievances seems to be a sense that the Chancellor is acting experimentally and irresponsibly in a way that is creating major risks to UK financial markets as well as its economic outlook. Former US Treasury Secretary Larry Summer, the German finance minister Christina Lindner and Virgin Atlantic’s CEO Shai Weiss have all commented publicly on the new economic direction laid out by the new UK government with deep scepticism.

Weiss alongside JP Morgan economist Allan Monks have argued that the fiscal strategy should in fact be reversed or reconsidered.

The pound is calmer today, hovering below $1.08 against the US dollar.

And Sky News are reporting that Liz Truss had to be convinced that the government should issue a statement yesterday to calm the markets.

We’ll be back tomorrow…. GW

How an interest rate rise to 6% would hurt homeowners

Rightmove have warned that the average monthly mortgage payment for a household buying a first-time buyer home would rise to £1,302 if the average mortgage rate rose to 6%, as looked likely yesterday.

That’s based on taking out a two-year fixed mortgage, at 90% LTV (ie, with a 10% deposit).

They add:

This monthly payment would be 60% higher than those getting on the ladder at the start of 2022.

For two people buying a first home together and splitting the £1,302 payment, the monthly payment each of £651 would equate to 25% of their gross average salary, up from 15% at the start of the year.

Updated

Ireland lifts spending in budget, but avoids UK-style splurge

Minister for Finance Paschal Donohoe (right) and Minister for Public Expenditure Michael McGrath arriving at Government Buildings, Dublin, to unveil the Government's Budget for 2023.
Minister for Finance Paschal Donohoe (right) and Minister for Public Expenditure Michael McGrath arriving at Government Buildings, Dublin, to unveil the Government's Budget for 2023. Photograph: Damien Storan/PA

Ireland has unveiled a budget that ramps up spending and gives tax relief but pales in comparison to the UK’s blowout, our Ireland correspondent, Rory Carroll, reports from Dublin.

The finance minister, Paschal Donohoe, announced measures worth more than €10bn today to cushion households and businesses against rising prices but held back from a full-throttle fiscal expansion.

He told the Dáil.

“It is essential that we use our surpluses wisely – we should not spend everything today to ensure that we are ready for tomorrow.”

The government earmarked about €1bn to tweak the 40% top tax rate so that it will apply to income above €40,000, rather than €36,800.

The lion’s share of the spending will be on extra welfare payments, energy credits, public transport subsidies and rent tax credits.

The British Irish Chamber business group welcomed the budget for replenishing the nation’s “rainy day fund”.

“While the fund is far from enough given the volatility of corporation tax, the move will allow the country to think long term and prepare for future risks and liabilities like interruptions to trade and supply chain issues.”

Commentators had urged the centre-right coalition government to avoid a UK-style splurge.

The Irish Times said:

“The message sent out by the budget needs to be one of stability and a credible plan for the public finances.”

Sky: Liz Truss had to be convinced to issue statement to calm markets

Sky News have an eye-catching story, that Liz Truss had to be convinced that the government should issue a statement yesterday to calm the markets.

The prime minister’s initial instinct had been to stand firm and say little or nothing as the pound hit a record low, and government bonds slumped, according to Sky’s deputy political editor Sam Coates.

He writes:

Faced with market turmoil, spiking borrowing costs, and the drop in the value of the pound in the foreign exchange markets, the prime minister’s initial instinct was to stand firm and say little or nothing, unwilling to look like she might be shifting position.

However, after a meeting with Chancellor Kwasi Kwarteng yesterday, Ms Truss agreed the Treasury would issue a statement promising further details on 23 November on how the government would ensure borrowing would not spiral out of control.

Coates adds that the government will reject claims circulating in Whitehall that the meeting between Ms Truss and Mr Kwarteng was “argumentative” and descended into a “shouting match”.

Here’s the full piece.

Huw Pill’s prediction of a ‘significant’ response to the mini-budget (and the resulting market mayhem) is going to alarm homeowners who need to refinance a mortgage next year.

Rates are clearly heading up, sharply, unless the situation changes dramatically.

My colleague Zoe Wood explains what it will mean:

It depends what type of deal you are on. Most borrowers are on fixed-rate mortgages, so are insulated from the upheaval for the time being. However, the upshot of all this is less choice and higher borrowing costs when you do need to find a new deal.

Someone who fixed at 2% two years ago could be looking at a remortgage rate at 5% by next week. If they had a £200,000 mortgage over 25 years, that’s a rise in monthly payments from £848 to £1,169 – or £321.

About a fifth of households are on a variable rate – either a tracker mortgage, where the rate you pay is explicitly linked to the Bank base rate, or their lender’s standard variable rate (SVR). Amid the announcements that products were being withdrawn Halifax and Scottish Widows Bank said their SVR was going up by 0.5% to 5.74%.

Higher mortgage costs are also bad news for first-time buyers who may have to lower their budget in order to manage repayments on the loan.

If you have six months or less to run on a fixed-rate mortgage it might be wise to start shopping around for a new rate. Given the market turmoil, you may want to talk to a broker who understands the fast-changing mortgage sector outlook and can track down the best rates.

Imran Hussain, a director at Harmony Financial Services, predicted mortgage products will “get chopped and changed quicker than we can all keep up”. “The mortgage market was already hectic and now it’s going haywire,” he said.

Here’s the full piece:

The FTSE 250 share index has dropped to a new 22-month low, extending its losses following Huw Pill’s speech.

The FTSE 250 contains more domestically-focused firms than the blue-chip FTSE 100, making it more vulnerable to a British economic downturn.

It’s down 1.5% today, at levels last seen in November 2020 (before the first successful Covid-19 vaccine results).

Real Estate Investment Trusts, which own UK property assets, are among the top falls – some down over 7% today.

That shows that their underlying assets, such as shops and warehouses, have fallen in value due to the looming surge in interest rates.

Updated

Huw Pill added that while the BoE’s next scheduled policy announcement (on the first Thursday in November), seemed like a long way away, it is better for central banks to take a “more considered approach, a lower frequency approach,”

In the meantime the BoE would rely on communicating its intentions, the BoE’s chief economist added.

That strategy could some under serious market pressure over the next five weeks, though. If the pound starts sinking to new lows, nearer to parity, the Bank will face more calls for action.

Overnight, a former BoE policymaker, David Blanchflower, predicted that the markets would force the UK’s top fiscal and monetary policymakers into a change of heart:

Bank of England chief economist sees ‘significant’ response to mini-budget

The Bank of England is likely to deliver a “significant policy response” to last week’s announcement of tax cuts by finance minister Kwasi Kwarteng, its chief economist says.

But Huw 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).

Pill told the CEPR Barclays Monetary Policy Forum that:

“It is hard not to draw conclusion that this will require a significant monetary policy response.”

A ‘significant’ response is central bank-speak for a large interest rate rise.

Pill explains that the Bank’s monetary policy committee is not indifferent to the repricing of financial assets [which have plunged alarmingly since Friday morning’s mini-budget].

And he said he wanted to ‘flag clearly’ that the government’s fiscal announcement will “act as a simulus”.

That’s a sign that Pill thinks monetary policy must respond to Kwarteng’s tax cuts plan, with higher interest rates.

The surge in UK long-dated bond yields is quite serious…..

UK gilts under pressure again

Kwarteng’s comments haven’t brought any obvious relief to the bond market.

UK gilt prices are falling again, pushing up the yield (or interest rate) on 10-year gilts to the highest since late 2008, at 4.377%

The 30-year gilt yield has continued to rise, hitting the highest level since 2007 at 4.838%.

The gap between UK and safe-haven German government debt has widened too – to the most since 1991.

That shows that investors are imposing a higher risk premium to hold UK assets, as confidence in Britain remains in shorter supply.

Indeed, it costs London twice as much as Berlin to borrow for a decade. UK 10-year gilts are trading at a 4.28% yield, compared to just 2.15% for German bunds.

Updated

Here are some photos from Kwasi Kwarteng’s meeting with top bosses from the UK’s financial services industry.

The Chancellor Kwasi Kwarteng meets representatives of the Financial Services industry at the Treasury
The Chancellor Kwasi Kwarteng meets representatives of the Financial Services industry at the Treasury
Kwarteng speaking, with Fidelity CEO Anne Richards in the foreground Photograph: Simon Walker/HM Treasury

As flagged earlier, the meeting was meant to be a polite conversation about Kwarteng’s plans to unleash growth. It looked rather more fraught due to the plunge in sterling, and the surge in bond yields.

As Bloomberg reported this morning, before the meeting:

Two veteran financiers said the chancellor’s offhand tone also appeared to ignore the seriousness of loading Britain up with debt. That will have rattled watching investors, they added, complaining that Kwarteng - who did a PhD thesis on a 17th-century sterling crisis - hasn’t shown enough willingness to be guided by what’s actually happening in the markets.

That won’t help as he turns to the City for assistance selling the £100 billion ($106.5 billion) or more in government bonds needed to fund his plan, they added.

Updated

The chancellor also insisted that he was right to announce tax cuts last Friday, telling leading bankers, insurers and asset managers that:

“We have responded in the immediate term with expansionary fiscal stance on energy because we had to. With two exogenous shocks - Covid-19 and Ukraine - we had to intervene. Our 70-year-high tax burden was also unsustainable.

“I’m confident that with our growth plan and the upcoming medium-term fiscal plan - with close co-operation with the Bank - our approach will work.”

But as you already know far too well, almost all those tax cuts go to the richest 5%….

Kwasi Kwarteng also told City investors that he will produce a ‘credible plan’ to start bringing down debt, as a share of the economy, at his planned statement in November (two whole months away…)

“Cabinet ministers will set out more supply-side measures over coming weeks to make meaningful change. Right across Government, departments have to be focussed on this.

“As I said on Friday, every department will be a growth department.

“We are committed to fiscal discipline, and won’t re-open the spending review. We have a Medium Term Fiscal Plan coming on 23 November, alongside an OBR forecast. That will be a credible plan to get debt to GDP falling.

Kwarteng: I'm confident our plan will work

UK chancellor Kwasi Kwarteng has told leading bankers, insurers and asset managers at today’s meeting that he is “confident” that his economic strategy will work.

In his meeting with City chiefs this morning, Kwarteng said he was confident that the long-term strategy to drive economic growth through tax cuts and supply side reform would work.

In an attempt to reassure the City of London, rocked by days of turmoil, the chancellor reiterated the government’s commitment to fiscal sustainability (days after annoucing unfunded tax cuts that will require a surge in borrowing…).

He also argued that supply side reforms would cool inflation, as increased capacity brings down prices.

Kwarteng said:

“I’m confident that with our growth plan and the upcoming medium-term fiscal plan — with close co-operation with the Bank — our approach will work.”

It shows that Kwarteng plans to stick to his economic strategy in the face of a market selloff that sent the pound crashing.

But of course it’s the confidence of international markets – not the chancellor – that really matters, and will determine whether the crisis abates, or intensifies.

What would it take to prompt the Bank of England into an emergency rate hike, ahead of their scheduled meeting in early November?

Professor Costas Milas of the University of Liverpool’s Management School tells us that a credit rating downgrade could be a possible trigger for emergency action to boost sterling.

He explains:

I believe that the Bank of England will have to act if credit rating agencies (CRAs) downgrade the UK sovereign debt. This, in my view, is likely. CRAs usually take action when either economic policy uncertainty rises significantly and/or debt rises to unsustainable levels.

Economic policy uncertainty (measured here) is at its highest level since the beginning of the COVID-19 pandemic.

A chart showing how the value of sterling fells when economic uncertainty rises

This is ‘hammering’ both the sterling effective exchange rate and sterling against the dollar. At the same time, UK debt will rise significantly following the chancellor’s min-Budget.

What remains to be seen is how high the UK debt will go since, currently, we do not have official estimates of the additional debt burden. Something that will tempt CRA’s to think seriously about a credit rating downgrade.

The Treasury and the Bank of England could, and should, have done a better job in helping the UK through the very difficult winter ahead, argues Dario Perkins, managing director for Global Macro at TS Lombard.

Perkins, a former Treasury economist, has also argued that the UK is now suffering from a “Moron Risk Premium” (MRP).

Basically, because the markets think government policy is fundamentally incoherent, and don’t trust the Bank of England to step in, they downgrade UK assets across the board, from the pound to gilts.

Economist Jonathan Portes has covered this compelling theory in the i, here.

As an aside, Perkins also came up with the superb “Paolo Maldini guide to central banking”, coined after the legendary defender known for his superb positioning and timing.

The idea is simple: once inflation is a problem, there is no real chance of a “soft landing” because the central bank has already messed up.

More here: Don’t Bet On A Soft Landing

These days, Italian defenders use cruder tactics when they’re caught out of position – and the Bank may have to do the same to pull back runaway inflation….

Updated

This is an important point about the pound’s modest recovery today:

The jump in mortgage costs is a real worry to homeowners on fixed deals, especially borrowers who still have a lot of their loan to pay off.

Britain’s long-term borrowing costs are continuing to climb, worryingly.

The yield, or interest rate, on 30-year gilts has jumped above 4.6% this morning, up from 4.4% on Monday. That’s the highest since 2008.

At the start of last week, 30-year gilts were trading at a yield of 3.5%.

Yields move inversely to prices, so this shows it will cost Britain significantly more to borrow for the next 30 years.

Virgin Atlantic chief urges UK government to reverse course to lift pound

Virgin Atlantic’s chief executive has called on the UK government to “consider reversing” some of the policies announced last week, to prop up the pound.

Shai Weiss told a press conference in London that sterling’s fall in value is hurting the economy and hurting consumers, and fuelling the UK’s inflation cycle.

Weiss said that Virgin Atlantic had taken some “very smart financial positions” to ease the impact of the weak pound on its business [which suggests they’re hedged against a fall in sterling]

But the company is concerned about the economic environment. And Weiss suggested that Liz Truss should take a “difficult decision” to reverse sterling’s slide, arguing:

“Sometimes all of us in this room should be humble enough to say: ‘If I did something that is not working, maybe I should reverse course.’

“That is not a bad thing to do.”

That would mean dropping some of the tax-cutting measure in the mini-budget that will drive up borrowing, fuel inflation, and worsen Britain’s current account deficit.

Wess said Truss should take steps to protect the country from the loss of confidence in international markets, which risks driving up interest rates, and hurting the economy.

“The message to Government is pretty clear in my mind. Prime Minister Liz Truss has taken difficult decisions upon entering into the role

“Maybe you need to take a more difficult decision to reverse the declining pound and ensure that this country is not left with unsustainable perceived weakness in international markets, which of course then impact interest rates, impact consumers, impact mortgage rates, impact the entire economy.

Deutsche Bank have calculated that the surge in UK 10-year borrowing costs in recent days is the biggest shift in gilt yields since 1976.

That year, Britain turned to the IMF for a loan to prop up the pound, following the inflationary surge caused by the infamous giveaway Barber budget of 1972.

Jim Reid of Deutsche Bank says there have only been four larger moves since 1934, underlining the dramatic volatility created by the mini-budget.

So these are really big moves and continue the rolling VAR shocks of the last 12 months in fixed income.

[VAR measures the riskiness of a bond]

Hundreds of mortgage deals vanished in market turmoil

Nearly 300 mortgage deals have been pulled in the last 24 hours by banks and building societies after the fall in the pound fuelled forecasts of a jump in interest rates.

The Bank of Ireland, Clydesdale Bank, Post Office Money and a slew of building societies including Monmouthshire, Furness and Darlington are among the names to have withdrawn products, our consumer affairs correspondent Zoe Wood writes.

In a statement Bank Of Ireland said that:

“due to changes in the financial market, we don’t currently have any new rates available for new or existing customers. We’ll launch a new range of mortgage rates as soon as possible”.

There are now 3596 residential mortgage deals available, down from 3880 at the start of this week, according to data firm Moneyfacts. At the end of last year would be borrowers would have had 5315 products to choose from.

Rachel Springall, finance expert at Moneyfacts, said the market was extremely volatile at the moment so borrowers need to seek independent advice to assess what their best options are right now:

“The upheaval in the mortgage market may cause frustration amongst both borrowers and brokers as they see deals disappear overnight.”

The overnight reduction in deals – the equivalent of about 7% – comes as lenders struggle to accurately price their products after last week’s mini budget sent the pound and government bonds plunging.

Virgin Money and Skipton Building Society were among the lenders who pulled their range of mortgage deals on Monday, while Halifax is withdrawing its fee-paying mortgage products

Updated

The financial markets are now pricing a slightly lower surge in UK interest rates.

UK Bank Rate is now expected to rise to around 5.8% by next summer, below the 6% peak seen yesterday.

But that would still be more than double current levels of base rate (2.25%).

Germany worried about UK's 'major experiment'

The German government is concerned that Britain is conducting a ‘major’ experiment, by cutting taxes and boosting borrowing just as the central bank is raising interest rates.

German finance minister Christian Lindner raised doubts about the British government’s plans to accelerate spending while the central bank tightens policy to rein inflation.

In another sign of rising international concern, Lindner warned:

“In the UK, a major experiment is starting as the state simultaneously puts its foot on the gas while the central bank steps on the brakes,”

Speaking last night, at an event hosted by the Frankfurter Allgemeine Zeitung newspaper, Lindner suggested that it wouldn’t end well….

“I would say we wait for the results of this attempt and then draw the lessons.”

JP Morgan economist Allan Monks argues that Kwasi Kwarteng will need to reverse his strategy.

This can’t wait until chancellor lays out his medium-term fiscal plan on November 23rd, Monks warned (via Reuters).

Monks said the statements from Kwarteng, and the Bank of England, yesterday were “measured”….

“But there is still no clear sign that the source of the problem - the government’s fiscal strategy - is being reversed or reconsidered.

This will need to happen before November in order to avoid a much worse outcome for the economy.

Summers: crisis could drive pound below euro and dollar parity

Larry Summers, a former US Treasury secretary, has warned that the UK government’s ‘utterly irresponsible’ plans could drag the pound below parity against the euro, as well as the dollar.

Summers has heavily criticised chancellor Kwasi Kwarteng for undermining credibility by saying ‘incredible things’ about planning more tax cuts -- those weekend comments pushed the pound to a record low of $1.0327 on Monday.

Summers says he was “very pessimistic about the consequences of utterly irresponsible UK policy on Friday,” but didn’t expect the markets to get so bad so quickly.

Summers also suggests the Bank of England should have taken more decisive action, rather than its ‘timid’ statement yesterday.

Summers says:

The first step in regaining credibility is not saying incredible things. I was surprised when the new chancellor spoke over the weekend of the need for even more tax cuts.

I cannot see how the BOE, knowing the government’s plans, decided to move so timidly.

Summers pointed to surging interest rates of long-dated British debt as a “hallmark of situations where credibility has been lost”.

“This happens most frequently in developing countries but happened with early Mitterrand before a U-turn, in the late Carter Administration before Volcker and with Lafontaine in Germany.”

Summers warns that there could be global consequences from a currency crisis in the pound, as it is a reserve currency.

The magnitude of Britain’s trade current account deficit underscores the seriousness of its challenges. My guess is that pound will find its way below parity with both the dollar and euro.

Currently the pound is trading at €1.12, having hit €1.08 in yesterday’s crash, the weakest since the end of 2020.

Here’s the full thread.

Updated

After two frantic days, the markets are somewhat calmer today.

Sterling is holding onto the $1.08 point against the US dollar, up a cent this morning, but still slightly below its close on Friday night after the initial shock of the mini-budget.

UK government borrowing costs are recovering a little too, after surging on Friday and Monday.

The yield, or interest rate, on short-dated two-year bonds has dipped by 0.13 percent to around 4.2% – still sharply higher than at the start of September (when it was 3%).

Updated

The slump in UK government bond prices has added to a grim year for sovereign debt.

Bank of America strategists have calculated that government bond markets are on course for the worst year since 1949, when Europe was rebuilding from the ruins of World War Two.

Full story: Kwasi Kwarteng to hold crisis meeting with bankers after pound plunges

Kwasi Kwarteng is meeting with Britain’s top bankers and other senior City figures on Tuesday, in planned talks that are likely to turn into a crisis meeting after the sell-off of the pound and government bond market meltdown.

Banks emerged among the biggest beneficiaries of Friday’s mini-budget when the chancellor scrapped the EU banker bonus cap and the top 45% rate of income tax, cut stamp duty to prop up the housing market and trailed “an ambitious package of regulatory reforms” to be unveiled this autumn.

However, the announcement sent the pound and government bonds plunging, as the scale of the tax cuts, which overwhelmingly benefit the better-off, shocked markets and prompted worries about how they will be paid for.

Here’s the full story:

Market mayhem means balancing the books will be harder

The panicky market reaction to the mini budget means it will be harder for Kwasi Kwarteng to balance the books.

Resolution Foundation chief executive Torsten Bell warns it may mean £15bn of additional ‘tough choices’ (spending cuts, or tax rises).

Kwasi Kwarteng said yesterday he’ll announce how the government will get debt falling as a share of GDP in the medium-term, in November.

Bell told Sky News it will be tough.

“The world we are heading for is a bumpy few weeks. The Chancellor is now going to have quite a tough time because he has now set out plans to balance the books in November. That is going to be very hard.

“Actually balancing the books in November is going to be harder than it would have been to show you are balancing the books last week because higher interest rates will make it harder to do.

“You might need 15bn-worth of tough choices now that you didn’t need last Friday.”

Bell also explained that the markets don’t think the government’s plans are actually serious:

“In the end, lower taxes will mean worse public services, or other people’s taxes having to go up, and it is those choices and ducking those choices that markets are looking at and saying that is not what serious policy making looks like.”

Updated

The slump in gilts now means it costs more for the UK to borrow than Italy and Greece, former BoE governor Charlie Bean adds.

He tells the Today Programme:

One fact to get your head round. It now costs the UK government to borrow… than Italy or Greece, who we’ve traditionally thought of as being, well not quite basket cases, but certainly weaker-performing sovereign entities.

This is true for five-year borrowing (Bean misspoke by saying 10 years – we’re not there yet).

Today, UK five-year gilts are trading at a yield of 4.3% – higher than Greece (4%), or Italy (4%), who were both gripped by the eurozone debt crisis a decade ago (here’s a liveblog from those dramatic days).

The slump in the pound, and the surge in bond yields does show that the financial markets are increasingly concerned about the direction of UK macroeconomic policy.

Unlike eurozone members, though, the UK sets its independent monetary policy – and prints its own currency.

The fall in the pound reflects fears that that UK’s current account deficit (measuring the flow of goods, services and investments in and out of the country) will balloon even wider – requiring an even weaker currency to bring it into line.

Toby Nangle, former global head of asset allocation at Columbia Threadneedle Investments, wrote a good piece about this in the FT.

Here’s a flavour:

The current account deficit is now forecast to average eight per cent of GDP in 2022 and 2023, according to Pantheon Macroeconomics, an independent research consultancy. Bank of England data going back to 1772 shows that this level of deficit has only been exceeded on three occasions, each of them during the second world war.

In simple terms, the British people have become poorer without enjoying the benefits of a more competitive currency that the textbooks promise. And they are more reliant than ever on the kindness of strangers.

The balance of payments crisis claim still sounds hyperbolic. After all, a weakening pound improves the country’s international investment position. And there is no obvious large overhang of borrowings in dollars that would raise the debt-to-GDP ratio if the pound falls.

But sterling has been increasingly at risk of losing its “developed market privilege”, which confers safe-haven status on your assets, increasing the state’s ability to run countercyclical monetary and fiscal policy.

Charlie Bean adds that the government got the sequencing of its growth plan wrong.

It should have started with focusing on the structural reforms it wants to implement to lead to better growth, and preserved fiscal responsibility and ‘sound money’.

Then, if the growth bet delivered, you can do the tax cuts.

That’s exactly what Margaret Thatcher did, Bean explains – starting with fiscal consolidation, getting inflation down, then privatisations and structural reforms – and then only tax cutting at the end under Nigel Lawson.

Updated

Former deputy Bank governor: emergency meeting may have made sense

Former Bank of England Deputy Governor Charlie Bean has suggested that the BoE should have called an emergency meeting this week to tackle the sterling crisis.

Bean says that the Bank are rightly reluctant to have emergency meetings every time there’s turmoil in the financial markets.

But on this occasion, it might have made sense.

Speaking on Radio 4’s Today Programme, Bean explains:

“On this occasion if I had still been at the bank in my role as deputy governor I certainly would have been counselling the governor that I think this is one of those occasions where it might have made sense (to call a meeting),”

Bean adds, though, that the Bank would have needed to have taken action (by raising interest rates).

“The key thing is, if you call it, you have to take significant action.”

Bean adds that the lesson of these episodes, where a currency is weakening and longer-term interest rates are rising, is that “you go big and you go fast”.

Updated

The shock increase in UK government bond yields in the last few days is the equivalent of Queens Park Rangers beating Manchester United 5-0, says Mohamed El-Erian, chief economic adviser at Allianz.

El-Erian (a QPR fan), told the Today programme:

The move in yields, 100 basis points, up 25 basis points in two days is somewhere between unthinkable and unlikely.

It has happened, and now the economy is adjusting to it, and that is the concern.

[Today presenter Nick Robinson (a Man United fan) points out that 5-0 losses happens ‘rather too often these days’]

Updated

The next few days will be crucial in determining the impact of the crisis on mortgages, according to Julie-Ann Haines, chief executive of the Principality Building Society.

Haines told the Today Programme that there have been “very significant increases” in mortgate rates this year, adding an extra £3,000 to £4,000 to an average £250,000 mortgage.

What the markets do in the next 10 days is really quite important in determining quite how big the impact is.

The pound has plunged across the board against all major currencies in the last week, and almost all the others too:

Streeting: mortgage holders face 'huge' extra costs if rates jump

Shadow health secretary Wes Streeting has warned that the turmoil in the mortgage market this week, which forced several lenders to pull deals, is just the ‘tip of the iceburg’.

He told Sky News:

“All of us are frankly still recovering from our jaws hitting the floors last week with that budget from Kwasi Kwarteng.

“And the real world consequences we’re seeing overnight, the withdrawal of mortgage products, tell us about the extent to which our own Chancellor in this country has frightened the markets.

“This is just the tip of the iceberg, if interest rates go up in the way that some people are predicting that’s going to be huge additional costs to people with mortgages.

“And what was the Chancellor’s answer yesterday? ‘Don’t worry folks, in November I’m going to come up with some new fiscal rules - ie I’ve ignored all the ones I’ve already got and I’m rewriting the rules and making them up as I go along’.

Streeting added that “This isn’t serious leadership - it’s a reckless gamble,”

Updated

The political naivety of Trussonomics is staggering: Nils Prately

The key, dangerous, charge against Liz Truss and Kwasi Kwarteng is that they lack the competence to get their “new era” for the UK economy off the launchpad, our financial editor Nils Pratley explains:

Nils warns that a lot of financial credibility has been shredded in just two trading days, writing:

Do they understand that, when you’re running a large current account deficit and need to borrow the thick end of £200bn next year, financial markets matter?

The prime minister and chancellor might have expected a bumpy reception, but what they got was an open revolt in markets and some extraordinary comments from grown-up economists at serious firms. “Hope is not a strategy,” said Nomura’s team, predicting parity for the pound against the dollar by year end. “Investors seem inclined to regard the UK Conservative party as a doomsday cult,” said Paul Donovan at UBS Global Wealth Management.

While Monday morning’s record low against the dollar grabbed the headlines, sterling has also fallen about 8% on a trade-weighted basis in two months. That is a chunky move, but one dwarfed by what’s happened with gilts. It cost the government 1.9% to borrow for 10 years in early August; that rate was 3.1% a week ago and is now 4.1% as the market tries to work out how far the Bank of England will have to raise interest rates.

Virtually nobody accepts the notion that the biggest tax cuts since 1972 can be anything other than inflationary.

Here’s the full piece:

The sterling crisis, and the government’s mishandling of the situation, dominate the front pages, with many depicting the pound’s swoon to record low.

The Guardian leads with “Sterling crisis deepens as Truss’s strategy unravels,” reporting that the government was struggling to prevent a full-scale loss of financial market confidence in its economic strategy.

The Financial Times has “Bank of England and Treasury fail to calm market nerves over UK finances”. The paper says a statement from the Bank “dashed market hopes of an emergency interest rate rise to prop up the pound

The Times leads on the central bank’s pledge to act after the fall of the pound with its headline “Bank vows to step in after day of turmoil”.

But the Express take comfort from Kwasi Kwarteng’s pledge to outline his debt reduction strategy (not for two months, though!).

Here’s the full round-up, by my colleague Virginia Harrison.

What the weak pound means for you

Consumers are going to suffer from sterling’s tumble.

A weak pound pushes up the cost of imported food, petrol, cars and consumer goods – which firms will pass on to consumers

It will also drive up the cost of mortgages (as the Bank of England is expected to hike interest rates to prop up sterling), and make foreign holidays pricier.

Here’s a full explanation:

Seema Shah, chief strategist at Principal Global Investors which manages around $500bn in assets, has warned that it’s hard to know how far the pound will fall:

“Once a market starts to move with this kind of momentum, it’s hard to put a number on where it (sterling) will trough.

“But as an investor you take a long-term view. If you look at the UK as somewhere to invest over five years, for me that’s a no.”

Labour surges in polls as voters recoil from mini-budget

Giving tax cuts to the rich is not a vote winner.

A YouGov survey for The Times has found that Labour has taken its biggest opinion lead over the Tories since the firm began polling in 2001.

Labour are 17 percentage points ahead of the Conservatives, with 45% support, vs 28% for Liz Truss’s party.

The survey revealed widespread public opposition, including among Tory supporters, to the tax-cutting measures announced by the chancellor last week.

Kwarteng’s decision to scrap the 45% rate of tax for those earning more than £150,000 was opposed by 72% of voters, including 69% who backed the Conservatives in 2019.

Just 19 per cent of voters thought Kwarteng’s budget was “fair” — the worst polling figure since YouGov began to ask the question in 2010.

Here’s the full story.

Kwarteng facing difficult meeting with London’s top bankers today

Kwasi Kwarteng faces a fraught meeting of City bosses today at the Treasury, following the horrific market reaction to his tax-cutting mini-budget.

Kwarteng and new City minister Andrew Griffith are due to welcome senior leaders from banks, insurance companies and asset managers today, Bloomberg reports.

The aim of the meeting was originally to come up with some bold ideas for the government’s so-called “Big Bang 2” plans to re-energise the City.

But the slump in the pound, and the brutal selloff in gilts, mean it will be more of a crisis summit than a convivial conversation. Kwarteng will not be able to get away with dismissing the sterling crisis as mere market gyrations.

Bloomberg explains:

Bankers were meant to be wowed by measures such as the end of a cap on their bonuses and the scrapping of the 45% top tax rate, and the early reaction from industry bodies was positive on Friday.

But Monday’s markets meltdown, which sent the UK’s borrowing costs soaring, killed off those good vibes.

Kwarteng will need to demonstrate that he understands the seriousness of the dramatic drop in the pound and gilts rather than characterizing them as short-term fluctuations, several financiers said. Attendees will want answers on how he can restore investor confidence.

Introduction: Sterling crisis gripping markets

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

Investors are bracing for another day of sterling volatility, as the crisis created by the government’s reckless mini-budget continues to grip the markets.

The pound is slightly higher in early trading, clinging onto the $1.08 mark, after hitting an alltime low around $1.035 yesterday morning. It’s still down 7% this month.

And the pound still looks extremely vulnerable, as the Treasury and the Bank of England struggle to prevent a full-scale loss of financial market confidence.

UK government bonds are on track for their worst month on record, going back to the 1950s, as international faith in Britain is hammered by Kwasi Kwarteng’s binge of borrowing to fund tax cuts, mainly benefiting the wealthy.

The selloff has pushed the cost of borrowing for 10 years up to 4.1%, from 3.1% before the mini-budget.

Jim Reid, strategist at Deutsche Bank, says:

UK assets have remained at the eye of the storm as the negative reaction to the government’s mini-budget on Friday continued.

The country’s government bonds were completely routed for a second day.

The staggering slump in gilt prices in recent days has forced several mortgage providers, including Virgin Money and Skipton Building Society, to pull deals, with economists predicting that interest rates could rise to 6% by next summer.

That would leave many households facing massive increases in mortgage repayments, which will be impossible for some to meet.

Yesterday, the Bank of England resisted pressure to implement an immediate emergency rise in interest rates, which put fresh selling of the pound.

The pound’s calamitous slide to record lows has gripped global markets too, and even increased the risk of a global recession.

And Labour leader Sir Keir Starmer is expected to depict Labour as the party of “sound money” and fiscal responsibility at his keynote speech to the Labour conference in Liverpool.

The agenda

  • 12.30pm BST: ECB president Christine Lagarde speaks on a panel on financial stability challenges related to digitalisation of financial services

  • 1.30pm BST US durable goods orders for August

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