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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound plunges through $1.09 as former US Treasury secretary blasts ‘naive’ UK policies in mini-budget– as it happened

United Kingdom Kwasi Kwarteng Recession United States GfK Institute for Fiscal Studies Tax Cuts Britain Economy
The City of London in London, Britain, as investors await chancellor Kwasi Kwarteng’s mini budget this morning
The City of London in London, Britain, as investors await chancellor Kwasi Kwarteng’s mini budget this morning Photograph: Andy Rain/EPA

Closing post

Time to wrap up, after the most turbulent market reaction to a fiscal event that I can remember.

Investors are reeling from Kwasi Kwarteng’s package of huge unfunded tax cuts, and spending pledges such as the energy price freeze.

The pound is languishing at just $1.09 tonight, a 37-year low, and 3.5 cents lighter than yesterday, while UK government bonds have had a shocking day.

The yield, or interest rate, on two-year gilts close to 4% tonight, the highest since 2008, on fears over the huge borrowing ahead.

Here’s are some of our main budget stories:

Politics Live, with my colleagues Andrew Sparrow and Nadeem Badshah, has all the action on a remarkable day.

It’s been a very rough day on the London stock market too.

The blue-chip FTSE 100 has shed 2%, to end the day at a three-month low of 7018 points.

The domestically-focused FTSE 250 index also fell 2%, to its weakest level since November 2020 – when news of successful Covid-19 vaccines triggered a gobal rally.

Recession fears battered European market too, with the German DAX dropping 2%, and France’s CAC down 2.3%.

How bad was today? Bad, very bad….

Emergency interest rate hike needed to calm markets: Deutsche Bank

The situation in the markets is so bad that the Bank of England should hold an emergency meeting to raise interest rates, suggests a Deutsche Bank analyst.

George Saravelos, Deutsche Bank ’s head of global FX research, told clients that a “large, inter-meeting rate hike from the Bank of England as soon as next week” is needed.

This would “regain credibility with the market”, Saravelos explained in a research note.

He added that a strong signal by the BoE that it was willing to do “whatever it takes” to bring inflation down quickly and move real yields into positive territory would help.

Emergency central bank meetings are rare – usually triggered by financial crises, or a pandemic, not a ‘fiscal event’ meant to boost growth.

But Saravelos writes that the BoE needs to take action to prop up sterling.

Both the pound and gilts are experiencing historical drops today.

We are surprised to read some market commentary in recent hours suggesting that the appropriate monetary policy response to this extreme market volatility is for the Bank of England to reverse its planned sale of gilts. In our view, such a policy response would make things worse.

A raft of questions remain unanswered about the government’s £40bn Energy Markets Financing Scheme, our banking correspondent writes.

The programme is meant to make it easier for energy traders to secure bank loans to cover volatile prices, by offering to pay 100% of the losses if those traders go bust. As the Treasury explains:

The scheme will provide short term financial support and will be designed to be used as a last resort, with pricing and conditions reflecting this.

The scheme will ensure that energy firms can continue to operate and manage risk in a cost-effective way in the face of unprecedented volatility. This helps to reduce the eventual cost that businesses and consumers face.

However, the details are slim.

No banks are currently accredited to the scheme, and the details for how to apply or become accredited are still TBC (even though applications open on 17 October.)

We also have no idea:

  • how much energy firms will be charged for the loans, either in fees or interest rates,

  • how much they will be able to borrow, or

  • how quickly they will have to repay the loans.

Like much of the not-so-mini mini-budget, this seems to have been a policy rushed out in haste and the scheme still needs to be designed before banks agree to take part.

But it may be a “lesson learned” moment from the Covid loan schemes, which have been accused of being too lax and being open to fraud. So, instead, the scheme will assemble an advisory committee to assess applicants, making sure they are in “sound financial health”, make a “material contribution” to the energy market, and be willing to undergo solvency checks.

But with the additional support for energy customer bills, it’s unclear what level of financial support is still needed.

And with the added hoops of passing the scrutiny of an advisory committee, it is unclear whether the terms of the loans will be worth the trouble.

Matt Western MP, Labour Member of Parliament for Warwick & Leamington, is also concerned that the markets have lost confidence in the government.

He asked Kwasi Kwarteng today whether he had fired ‘the starting gun on a run on the pound’ – a well-timed question, given sterling’s tumble this afternoon.

In reply, the chancellor accused the opposition of ‘talking down Britain’, and showing ‘an extraordinary interest’ in the gyrations of markets.

The chancellor said that ‘strong growth’ would improve market sentiment – although that market sentiment has clearly soured badly today.

Pound crashes as markets lost confidence in government

This is turning into an absolute rout on the pound, as the markets give a scathing verdict to Kwasi Kwarteng’s unfunded tax cuts and extra spending.

Having dropped through $1.10 earlier this afternoon, sterling has continued to crash….. all the way down to a new 37-year low of $1.09.

The pound has lost 3.5 cents today, cratering by 3% – on track for its worst day since the market panic of March 2020 when the pandemic hit.

Sterling has also fallen by two eurocents, to €1.1240 (the weakest in over 18 months).

Paul Dales of Capital Economics says the plunge in the pound, and in government bonds, shows that the markets don’t believe the mini-budget will deliver sustained, faster growth.

In a note titled “Kwarteng causes carnage”, Dales says:

The surge in gilt yields and the fall in the pound after the Chancellor announced his hefty tax cuts suggests that the markets have concluded the policies will lead to higher interest rates and more shaky public finances rather than a sustained period of faster real GDP growth. We agree.

While the fiscal loosening may make political sense, the size and timing of it doesn’t make much economic sense.

Investors are losing confidence in the UK government’s approach, warns JP Morgan analyst Allan Monks.

Markets expect [UK interest] rates to rise to over 5% - a reaction that cannot be explained by the mechanical impact of today’s fiscal easing alone, and instead reflects a broader loss of investor confidence in the government’s approach.

Monks has predicted that UK GDP will be 0.4% higher in the near-term as a result of the mini-budget, which he calls “a low return from such a costly and potentially risky package”.

Pound may tumble below $1 on ‘naive’ UK policies, warns former US Treasury secretary

Former Treasury Secretary Lawrence Summers has blasted the economic policies being adopted by Liz Truss, and warned that the pound tumble below parity against the US dollar.

Summers gave a blistering condemnation of the UK government, speaking on Bloomberg Television’s “Wall Street Week” with David Westin.

“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market.

“Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time.”

Summers, who was Secretary of the US Treasury from 1999 to 2001, said he wouldn’t be surprised if the pound eventually gets below a dollar, if the current path is maintained.

He added:

This is simply not a moment for the kind of naïve, wishful thinking, supply-side economics that is being pursued in Britain.”

Liz Truss is choosing a markedly riskier path in a bid to revive growth, says George Lagarias, chief economist at Mazars.

Echoing the 1980s, the ‘Great British Pivot’ includes a mix of tax cuts, consumption and business boosting, de-regulation, union weakening and unemployment disincentives.

Whether it will succeed remains to be seen and the danger lies not in the course taken, but in the difficulty of implementation.

There are several factors that must be overcome for growth to take hold, he explains:

  • The markets might not give Mr Kwarteng the time necessary for his plan to succeed. Traders, most of whom have never experienced such radical fiscal action in the UK, already reacted negatively. Two hours after the announcement, the Pound was losing 3% to the Dollar.

  • Inflation could grow as the Pound loses ground. This could wipe out consumer savings from taxes.

  • The Bank of England may decide to hike interest rates faster, to defend the Pound and stop imported inflation. Higher interest rates would mean that savings from taxes would end up being paid in higher mortgages.

  • Global growth could continue to drop, affecting the demand for British exports and the prices for British imports.

  • The de-regulation announced, as well as plans to prop up the British financial sector, could be hamstrung as Brexit negotiations which may determine access to European markets have yet to take place.”

Blanchflower: This is the economics of the madhouse

Economics professor Danny Blanchflower, former policymaker at the Bank of England, has condemned today’s mini-budget as the ‘economics of the madhouse’

Blanchflower fears the housing market is going to crash, as interest rates are hiked (possibly to 5% by next summer).

Pound has now fallen below $1.10

The pound has fallen below $1.10 for the first time since 1985 as investors took fright at the prospect of a surge in government borrowing to pay for Kwasi Kwarteng’s sweeping tax cuts.

Sterling was down by more than two cents against the dollar to a fresh 37 year low as fears over the future path for the public finances also triggered a surge in government borrowing costs.

The FTSE 100 was down more than 2% at 6,989 while the FTSE 250, which includes more domestic-focused firms, also fell more than 2%.

The sharp sell-off followed a raft of tax cutting measures announced by the chancellor, in the biggest giveaway in 50 years. Measures included the scrapping of the top 45% rate of income tax, which currently applies to those earning more than £150,000 a year.

The plunge in the pound today means that poorest households are actually worse off, calculates Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

That’s because they only get a few crumbs from the mini-budget (while high earners get a generous tax cut), while the fall in sterling will push up imported goods prices.

Updated

UK interest rates seen soaring over 5% by next summer

The money markets are now anticipating that UK interest rate could soar over 5% by next summer, due to the impact of the government’s tax cuts.

That’s more than twice their current level, even after the Bank of England’s half-point increase on Thursday, to 2.25%.

It would drive up the cost of variable mortgages sharply, and other forms of credit, hitting borrowers badly.

Implied UK interest rates

ING explain:

Bond holders are already rattled by inflation and by the prospect of more Bank of England (BoE) hikes. Even if the central bank hiked only 50bp yesterday, compared to market pricing of 75bp, markets are betting that the pace of hikes will have to accelerate.

The recent jump in yields implies that Bank Rate will peak next year well above 5%.

That in itself is not a great backdrop for bonds but what has rattled investors is the prospect of the BoE hiking more in response to generous fiscal policy.

Anxiety about the cost of freezing energy bills is also hitting UK gilts (government debt).

Investors are worried the UK Treasury may have signed a blank cheque, because the cost of the guarantee depends how high gas and electricity prices remain.

ING’s Senior Rates Strategist Antoine Bouvet and Global Head of Markets Chris Turner, explain

Alongside the confirmation of additional borrowing this year, the raft of tax cuts unveiled today clearly implies that it will not be contained to just this fiscal year.

The cost of the newly-announced measures is reported to be £160bn over five years but, with the cost of the energy price guarantee highly dependent on wholesale energy prices, investors are worried the Treasury has effectively committed to open-ended borrowing.

For all Kwasi Kwarteng’s talk about getting growth up to 2.5%, the mini-budget may only deliver higher interest rates, and a higher national debt in the long term.

So warns Ruth Gregory of Capital Economics:

The Chancellor claimed that this was a plan for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the government’s fiscal plans will be higher interest rates and a higher public debt burden.

The market reaction, which included a jump in gilt yields, means higher borrowing costs are already here.

The cost of insuring Britain’s debt against a default has risen to its highest level since mid-2020 as concerns mounted about the government’s plans to slash taxes and ramp up spending, Reuters reports.

Here’s the details:

S&P global market intelligence data showed 5-year credit default swaps (CDS) - derivative instruments that debt investors typically use to hedge risk or bet against something - jumped 3.5 basis points to 34.5 points.

Such a large move is unusual for a G7 economy and it took the CDS level to its highest since mid-2020, when global markets were still in the most volatile stage of the Covid-19 crisis.

Cost of insuring UK government debt against default jumps

As the UK issues its own currency, it can’t ever be forced to default on its debt, though.

Bond market 'completely spooked' by Kwarteng

The bond market is ‘completely spooked’ by Kwasi Kwarteng’s mini-budget.

So warns Toby Nangle, former global head of asset allocation at Columbia Threadneedle.

He has shown how today’s surge in five-year gilt yields (as bond prices have slumped) is worse than in any crisis since 1993.

Pound parity suddenly looks more likely following the mini-budget, says Fiona Cincotta, Senior Financial Markets Analyst at City Index.

Far from soothing concerns over the outlook for the UK economy, Liz Truss and Kwasi Kwarteng’s economic plan for the UK has sent the pound plunging. The announcement of the largest tax cuts since 1972 to boost growth and stave off a recession that has already started, has triggered a crash in the pound and the bond market.

The selloff in UK assets reflects the sheer panic as the new government’s stimulus package will not only grow an already sizeable debt burden, potentially to unmanageable levels but will also add to inflationary pressures.

The BoE, which has been reluctant to hike rates aggressively, will need to roll up its sleeves and fight inflation with larger rate hikes for here. Expectations for a 1% hike in November are already climbing.

It’s difficult to see how the pound can recover from here. Investors are pulling out of UK assets rapidly and who can blame them? Drawing comparisons historically, the last big tax giveaway in 1972 resulted in rampant inflation, unmanageable debt, and an IMF bailout.

Suddenly pound parity with the USD doesn’t look so unlikely.

Resolution: mini-budget means £55k tax cut for those on £1m/year.

The Resolution Foundation have rapidly assessed the impact of today’s mini-budget, and warned that the UK will borrow hundreds of billions more than expected.

They say::

The Chancellor’s £45bn package of tax cuts announced today, the largest in a single fiscal event since Anthony Barber’s ill-fated 1972 Budget, will boost growth in the short-term but raise interest rates and see an additional £411 billion of borrowing over five years.

The deterioration of the UK’s economic outlook since March, and additional packages of energy support, are estimated to have increased borrowing by £265bn over the next five years. Today’s tax cuts of £146bn raising that to £411bn.

Resolution has also worked out that someone on an income of £1 million will receive a tax cut worth £55,220 next year.

Very little goes to the poorest households:

Almost two-thirds (65%) of the gains from personal tax cuts announced today go to the richest fifth of households, who will be better-off on average by £3,090 next year.

Almost half (45%) will go to the richest 5% alone, who will be £8,560 better off.

But just 12% of the gains will go to the poorest half of households, who will be £230 better off on average next year.

Reminder, our Politics Live blog has full details:

Emma Mogford, Fund Manager at Premier Miton Investors, says markets will worry about the impact of the mini-budget on the economy:

“I suspect markets will worry that these tax cuts will keep demand for goods high, boosting inflation and hence putting upward pressure on interest rates. That is bad news for companies with lots of debt.”

Updated

The blue-chip FTSE 100 index has just fallen through the 7,000 point mark for the first time since June.

The Footsie has shed 2.4%, or 170 points, to 6990 – the weakest level since March 2022.

Nearly every share is in the red, with warehouse group Segro, North Sea oil and gas producer Harbour Energy, and property developer Land Securities the top fallers, all down over 5%.

There’s no recovery in the pound yet either:

Markets across Europe are also heavily in the red, after this morning’s flash PMI surveys showed the Eurozone economic downturn deepened in September, with business activity contracting for a third consecutive month.

'Fire sale' of UK assets as markets are spooked by mini-budget

Sterling is now tumbling against the euro too, as UK assets are hammered by the huge borrowing needed to fund the tax cuts announced today.

The pound has dropped by more than a euro cent to €1.132, its weakest level since February 2021.

Sterling is plumbing new depths against the dollar too – now down almost two cents at $1.106.

Neil Wilson of Markets.com says:

Sterling reacting with sub-optimal pessimism to the fiscal event with a fresh 37-year low with a 1.10 handle. And it’s not just a dollar move – see EURGBP.

The domestically-focused FTSE 250 share index has tumbled by 1.6% to its lowest since November 2020.

And government bonds continued to be hammered, as investors brace for the flood of debt sales to fund tax cuts and energy subsidies.

Wilson says there is a “fire sale of UK assets” which is “absolutely horrible to watch”.

The reaction in the bond market to the misnamed mini-Budget (it was anything but mini!) is striking with yields surging after the chancellor unveiled sweeping tax cuts that abandon any semblance of fiscal discipline. It means more borrowing and more borrowing costs. This is not the reaction any chancellor wants from a budget but what else could he expect?

Of course it’s not just vigilantism, per se – traders are now betting the fiscal easing will drive the Bank of England to take a much more forceful approach to tightening. Markets now indicate a 50% chance the BoE goes for a jumbo 100bps hike in November.

The United Kingdom Debt Management Office is raising its debt issuance plans for the current financial year by £72.4bn, to £234.1bn, to cover the cost of the unfunded tax cuts in today’s mini-budget.

The DMO will need to issue an extra £62.4bn of gilts – taking the total to £193.9bn – plus another extra £10bn of short-term Treasury bills (to cover debt management needs).

That’s fuelling the selloff in government bonds, as investors will demand a higher rate of return to buy this debt.

Pound tumbles below $1.11 to fresh 37-year low

Sterling is tumbling more sharply, as the financial markets give their verdict to the swathe of unfunded tax cuts announced by Kwasi Kwarteng this morning.

The pound has dropped below $1.11 against the US dollar, for the first time since 1985, as investors baulk at the huge extra borrowing needed to fund today’s plans.

Rachel Winter, Partner and Investment Manager at Killik & Co, says the recent weakness of sterling illustrates a lack of confidence in the government’s plans.

The pound is down 15% against the dollar over the last six months, and this morning’s budget has sent it down further.

This chart shows how UK bonds are slumping (pushing up yields) while other sovereign debt prices are much more stable:

UK government bonds have been hammeded by concerns about the extra borrowing needed to fund chancellor Kwarteng’s huge tax cuts.

The yield, or interest rate, on two-year UK gilts is surging, hitting to its highest level since the financial crisis of 2008.

Two-year gilt yields have jumped by 37 basis points, a massive one-day move, to over 3.8%.

Benchmark 10-year gilt prices have also weakened, pushing up their yield to the highest since 2011.

RLAM Head of Multi Asset Trevor Greetham says Kwarteng’s package would have made more sense after the financial crisis of 2008 – rather than today.

“Action to help struggling households and businesses pay their heating bills this winter was essential, but the scale of the tax cuts and spending increases in this announcement is breath-taking.

Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary Global Financial Crisis, when borrowing costs were low and private sector balance sheets were deleveraging. Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”

Kwarteng scraps 45% top rate of income tax - in biggest package in half a century

Over in Parliament, Kwasi Kwarteng has announced a staggering swathe of tax changes – in what appears to be biggest tax event since the early 1970s,

The chancellor has produced a huge rabbit from his hat – scrapping the 45% higher rate of income tax entirely, and cutting the basic rate from April 2023 from 20% to 19%.

Kwarteng also cancelled next year’s increase in corporation tax from 19% to 25%, scrapped planned increases in duty rates for beer, wine and cider, abolished stamp duty below £250,000 – and £435,000 for first-time buyers – and is winding down the Office of Tax Simplification (OTS).

The chancellor confirms almost 40 investment zones will be created with tax breaks for businesses, ditched the bankers bonus cap, and will bring forward measures to streamline regulations and remove EU-derived laws.

He also announced the government will legislate to tackle “militant trade unions” from closing down key infrastructure through strikes.

The laws will require unions to put pay offers to a member vote, to ensure strikes can only be called once pay talks have genuinely broken down.

Here are all the key points:

Updated

Businesses gloomiest since May 2020.

Another worrying sign – UK business optimism about the year ahead has hit its lowest level since the start of the pandemic in May 2020.

Bosses are increasingly anxious about the fall in business, and the surge in costs.

Dr John Glen, CIPS Chief Economist, explains why they are so worried:

“Business activity across the UK private sector fell at the fastest pace since January 2021 in September, with the headline index posting in contraction territory for the second month in a row.

Nerves about the strength of the UK economy impacted on new client wins as customers affected by cost of living pressures scaled back spend. Costs and prices charged remained elevated, and even with rates of inflation moderating since August, they were among the highest since the survey began in 1998.

And with interest rates at a 14-year high fo 2.25%, there’s little to cheer businesses.

The highest rise in interest rates for 14 years also means borrowing costs are now the highest since 2008, so there’s too little in the reserves to make private sector businesses look on the bright side as UK recession fears grow.”

The UK downturn is likely to intensify as we head into winter, Chris Williamson of S&P Global Market Intelligence adds, as the Bank of England continues to lift interest rates as Britain enter recession.

UK downturn deepens as firms fight soaring costs and falling demand

Britain’s private sector is shrinking at the fastest pace since the Covid-19 lockdowns of January 2021, data just released shows.

The Flash UK PMI Composite Output Index, which tracks activity across the economy, has dropped to 48.4 this month, which is a 20- month low.

That’s down on August’s 49.6 – any reading below 50 points shows the economy contracted. It’s another sign that the UK economy is in recession.

The report shows that cost pressures remain high and demand waned. Services sector firms contracted this month, for the first time since February 2021, while manufacturing continued to shrink.

Chris Williamson, chief business economist at S&P Global Market Intelligence, explains:

UK economic woes deepened in September as falling business activity indicates that the economy is likely in recession.

Companies report that the rising cost of living, linked to the energy crisis, and growing concerns about the outlook are subduing demand and hitting output levels to an extent not seen since 2009, barring the pandemic lockdowns and initial 2016 Brexit referendum shock.

Firms were hit by the fastest fall in new business in 20 months (again, since the winter lockdowns of 2021).

Export orders fell at a “sharp and accelerated rate”. Goods producers suffered the sharpest drop in foreign demand for 28 months and services companies were hit by the first reduction since December 2021.

The PMI survey also shows that inflationary pressures are running hotter than at any time in the survey’s history, before the pandemic.

Those cost pressures are being driven by the weaker pound – which pushes up import costs, as well as ongoing supply chain problems and soaring energy prices.

With UK consumer confidence at record lows, and the pound at its weakest since 1985, the economic outlook is darkening almost by the hour….

Updated

Follow the mini-budget live here

Kwasi Kwarteng is about to deliver the mini-budget – my colleague Andew Sparrow is live-blogging all the details here:

Sterling is continuing to hit new lows against the dollar (which is strengthening against other currencies too this morning).

The pound has now dropped by a cent this morning, to as low as $1.1165.

Steve Clayton, fund manager at HL Select, explains:

The US dollar continues to climb as investors look to the safe haven of the world’s most liquid asset at a time of economic and political turmoil. The flip side of that is weakness in other currencies.

This morning a euro buys you just 98USc, a decisive break below parity with the dollar. Brits contemplating transatlantic trips might want to run the numbers one more time, because a pound sterling now buys just $1.12, almost 20% less than it did a year ago.”

The downturn in the wider eurozone has also deepensed this month, as price pressures intensify.

Business activity in the euro area is contracting for a third consecutive month, the flash PMI survey from S&P Global shows.

They warn:

Although only modest, the rate of decline accelerated to a pace which, barring pandemic lockdowns, was the steepest since 2013.

Forward-looking indicators, such as new order inflows, backlogs of work and future output expectations, point to the decline gathering further momentum in coming months.

Germany's economic slump deepens

Germany’s economic downturn has deepened this month, as businesses were hit by soaring energy costs and a drop in new business.

Germany’s services firm, and its manufacturing sector, both contracted this month according to a ‘flash’ reading from data provider S&P Global.

Demand for goods and services deteriorated rapidly this month, due to surging energy costs and an increasingly uncertain outlook.

The data suggests Germany is heading towards recession – and has knocked the euro to a new 20-year low against the dollar, further below parity.

Phil Smith, economics associate director at S&P Global Market Intelligence, said:

“The German economy looks set to contract in the third quarter, and with PMI showing the downturn gathering in September and the survey’s forward-looking indicators also deteriorating, the prospects for the fourth quarter are not looking good either.

The deepening decline in business activity in September was led by the service sector, which has seen demand weaken rapidly as customers pull back on spending due tightening budgets and heightened uncertainty about the outlook.

Updated

ING predict the pound will continue to lose ground against the US dollar, and could hit $1.10 in the next month (it’s currently $1.119 after this morning’s drop).

ING’s global head of markets, Chris Turner, says investors have doubts about the government’s plans:

“Sterling net-net was a little lower after yesterday’s divided Bank of England hike.

Today sees the big reveal of Chancellor Kwasi Kwarteng’s ‘fiscal event’. As noted recently, typically looser fiscal and tighter monetary policy is a positive mix for a currency – if it can be confidently funded. Here is the rub – investors have doubts about the UK’s ability to fund this package, hence the Gilt underperformance.

“With the BoE committed to reducing its Gilt portfolio, the prospect of indigestion in the Gilt market is a real one and one which should keep sterling vulnerable.

Sterling isn’t very impressed by Kwasi Kwarteng’s plans, says Neil Wilson of Markets.com.

The widening trade deficit, which rose to almost an all-time high £27bn in the three months to July, is one half of a twin deficit that leaves traders bearish on the pound.

And all these tax cuts won’t help the other half of the UK’s twin deficit – the budget deficit - and it could lead to further re-pricing for sterling.

Wilson adds that “abandoning any semblance of fiscal discipline” is not usually a recipe for long-term confidence in the country’s assets.

The pound vs the US dollar
The pound vs the US dollar Photograph: Markets.com

Derek Halpenny, head of research at MUFG, said in a note he sees risks the pound could fall further over UK government policies that could possibly “lack credibility”.

Halpenny adds that the mini-budget could raise concerns over external financing pressures as “the budget and current account deficit combined looks to be heading to around 15% of GDP.”

Of the international banks and research consultancies polled by Reuters last week, 55% said there was a high risk confidence in British assets would deteriorate sharply in the coming three months.

Key event

Kwasi Kwarteng’s (expected) pledge to “turn the vicious cycle of stagnation into a virtuous cycle of growth” hasn’t sparked much excitement in the City.

The blue-chip FTSE 100 index has lost 0.6% this morning, dropping to its lowest since mid-July.

The smaller FTSE 250 index – which is more domestically-focused – is 0.2% lower. It’s seen as a better barometer for UK trading and prospects – and has shed a fifth of its value so far this year.

Richard J Hunter, head of markets at Interactive Investor, explains:

The FTSE 250 index has lost 22% so far this year, with the latest 0.5% rate hike from the Bank of England adding to tightening concerns at a time when growth is flat to non-existent.

It is expected that the government will unveil a new “fiscal event” later in a mini-budget which should involve tax cuts and increased spending in an attempt to stimulate growth. It remains to be seen how effective such moves might be, given the wider pressures affecting economies globally.”

Updated

This chart shows the pound’s fall towards the record low set in 1985.

The poud vs the US dollar since 1970
The pound vs the U dollar Photograph: Refinitiv

Pound hits 37-year low against dollar as UK 'ramps up borrowing at a dizzying pace'

Sterling has dropped to a fresh 37-year low against the US dollar – an unwelcome backdrop to Kwasi Kwarteng’s mini-budget this morning.

The pound has fallen below $1.12, the weakest point since 1985, and has now shed 17% against the dollar so far this year.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

The decline is partly due to dollar strength – the greenback is at 20-year highs against a basket of currencies, due to worries about the global economy and the series of large interest rates by the US Federal Reserve.

But it’s also due to concerns over the UK economy as it teeters towards recession.

Investors are anxious that Kwarteng’s mini-budget will drive up borrowing – especially as the Office for Budget Responsibility has not been allowed to provide forecasts for today’s event.

RBC Capital Markets say markets are left to speculate on “who has the appetite for gilts when the BoE is selling and the govt is ramping up borrowing at a dizzying pace”.

They forecast that the pound could fall even lower, to below $1.05 – which would be an all-time low.

For us, it leaves weaker GBP [the pound] as the clearest escape valve to keep financing a large current account deficit.

Our forecast is currently sub-1.05 for GBP/USD. If the Chancellor’s gamble to boost growth fails to pay off, it will leave GBP in an even bigger hole.

Updated

Minister: plans aren't a gamble

Simon Clarke, the Secretary of State for Levelling Up, has denied that the government’s fiscal plans are a gamble.

On this morning’s media rounds, Clarke told the BBC that tax cuts will spur economic growth that outstrips rising national debt.

“The evidence of the 1980s and the 1990s is that a dynamic low tax economy is what delivers the best growth rates - this isn’t a gamble, the weight of history and evidence is with us.”

Clarke also told Sky News that the budget will be a game-changer, and that growth will pay for the UK’s government spending plans

Asked if his view last year that some tax increases would be needed to repair government finances still applied, Clarke said:

“No, because what you’re doing now is that you’re going for growth...

The critical thing is we need to get the economy growing so that, frankly, the economic growth trajectory outstrips that of our debt.”

Here are more details of the slide in consumer confidence this month:

UK consumer confidence
UK consumer confidence Photograph: GfK

IFS director Paul Johnson has calculated that the mini-budget could be biggest tax-cutting fiscal event since Nigel Lawson’s Budget of 1988.

Mini-budget: what we expect

Kwasi Kwarteng will on Friday announce 30 separate measures – including tax cuts, new investment zones and an acceleration of infrastructure projects – in an effort to raise the economy’s growth rate to his stated target of 2.5% a year.

One of the main elements of the package – the £13bn reversal of the increase in national insurance contributions, introduced in April to fund the health and social care levy – will come into force on 6 November.

While almost 28 million people will keep more of their earnings as a result of the move, the Resolution Foundation thinktank said on average the poorest 10% of households would gain £11.41 in 2022-23, while the richest 10% of households would gain £682.

The mini-budget is expected to contain significant further interventions to boost growth beyond the reversal of the NICs rise and next April’s planned increase in corporation tax, Treasury sources have confirmed, with one Whitehall source describing the package as having “more rabbits than Watership Down”.

One key plank of the fiscal event will be new investment zones for 38 local and mayoral authorities in England – including West Midlands, Tees Valley, Somerset and Hull – which will have major planning deregulation to release more land for housing and commercial development, and tax cuts for businesses.

Introduction: UK consumers fear for the future as living standards slide

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

Consumers across the UK are the gloomiest on record as the economic picture darkens… as the government announces its plan to kick-start UK economic growth with a flurry of tax cuts that will drive up borrowing.

People are increasingly worried about their personal finances, and anxious that the economy is turning sour, research body GfK warns, a day after the Bank of England said the UK has probably entered recession this quarter.

GfK’s long-running Consumer Confidence Index has fallen another five points this month to a new low of -49.

That’s the worst since records began in 1974, as the tightening squeeze on living costs made people much more pessimistic about their own finances.

This is the fourth new low in five months, as the economy has been battered by rising prices and weakening activity.

Confidence in personal finances over the coming year shed nine points to -40, while confidence in the economy over the next 12 months lost eight points to -68, a really grim reading.

People are also very unwilling to buy big ticket items, as soaring inflation forces households to cut back.

GfK client strategy director Joe Staton said:

“Consumers are buckling under the pressure of the UK’s growing cost-of-living crisis driven by rapidly rising food prices, domestic fuel bills and mortgage payments.

“They are asking themselves when and how the situation will improve.

Kwasi Kwarteng will vow to break the UK’s “cycle of stagnation” today, by lowering the tax burden in a hotly awaited mini budget..

He’s expected to tell MPs that Britain needs a new approach, ‘focused on growth’, by saying:

“Growth is not as high as it needs to be, which has made it harder to pay for public services, requiring taxes to rise.

“This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s.

Even though today’s statement is officially only a ‘fiscal event’, it’s expected to include a 30-point growth package, including scrapping a planned increase in corporation tax from 19% to 25%, plus reforms to the City of London, ending the cap on bankers’ bonuses, and plans to create up 38 new Investment Zones across England.

Yesterday Kwarteng said the national insurance increase introduced earlier this year will be reversed from 6 November.

But economists are warning tht the plan will drive UK borrowing sharply higher, just as government borrowing costs are rising in the bond markets.

The Institute for Fiscal Studies warned this week that Britain’s mounting debts will be unsustainable if the government presses ahead with sweeping tax cuts.

GfK’s Staton points out that today’s mini-budget, and the longer-term agenda to drive the economy, are a major opportunity to improve the economic outlook.

It will also be a major test for the popularity of Liz Truss’s new Government.”

We also find out today how manufacturing and services companies in the UK, the US, and across the eurozone, are faring this month – and get a healthcheck on Britain’s retail sector.

Financial markets are subdued, as investors worry that interest rate hikes by central bankers are pushing major economies towards recession.

The agenda

  • 9am BST: Eurozone flash PMIs for September

  • 9.30am BST: UK flash PMIs for September

  • 9.30am BST: Chancellor Kwasi Kwarteng presents mini-budget

  • 11am BST: CBI Distributive trends survey of UK retailers

Updated

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