The so-called “small budget” of the UK’s new government on Friday caused a level of market volatility not seen in the country since the fall of Covid or the Great Financial Crisis.
A package of tax cuts is expected total £45 billion in the coming years, combined with a massive increase in spending to help households and businesses tackle higher energy bills, has investors worried about the future of the UK as it have a higher debt burden. That’s despite the fact that Finance Minister Kwasi Kwarteng set a growth target of 2.5% and pledged to put together a plan to reduce debt as a percentage of GDP over the medium term.
It comes like Inflation remains at 9.9% and the country has has likely entered a recession.
Here are some explosions:
Pound plunges
Sterling’s reaction to the government announcement was almost immediate and extreme.
The pound lost nearly 3.6% against the dollar on Friday and continued to fall on Monday as markets reopened. It hit an all-time low below $1.04 early Monday morning in London.
It has since recovered slightly, trading around $1.08 as of 8:30 a.m. Tuesday, but remaining at – until this week – a 37-year low. It was down from $1.35 at the start of the year.
While some supporters of the government’s plan have pointed to the dollar’s uptrend this year as the cause of the pound’s slide, the pound has also fallen against the euro.
The euro is currently trading around £0.89 – up from £0.84 at the start of the year – although the eurozone is facing significant challenges, from the energy crisis to the prospect of a recession. increasing.
Bonds move
Yields on UK government bonds have skyrocketed in the wake of government budgets – meaning their currency has fallen significantly (bond yields move inversely with price).
Gilt yield is now set for its biggest monthly gain since at least 1957, according to a Reuters analysis of both Refinitiv and Bank of England data.
Productivity per 10 years old browhich affects mortgages and other interest rates, has increased from
2.882% to 4.073% so far in September.
Soaring yields and a plunging pound have prompted some mortgage lenders to halt new home loans and withdraw certain mortgage offers.
More interest rate hikes?
An important question now is whether the Bank of England, has interest rate hike from 0.1% to 2.25% over the past nine months, will be pushed into faster and higher growth.
Yesterday, Governor Andrew Bailey speak the bank will “not hesitate to change interest rates when necessary.” However, he said a decision would be made at the next scheduled meeting in November, eliminating speculation about an emergency rate hike or intervention to lift the pound.
The UK overnight index swaps market currently shows an 80% chance of a rally to 3.5% i.e. a 125 basis point increase and a 20% chance of a further move higher to 3.75%.
