In the UK, another judgment day in the financial markets is approaching.
Monday morning will offer the first chance for investors to give their verdict on the government’s rapid change plan for the public finances of the country. And importantly, this will be the first trading session since the central bank ended the program spend billions of pounds supporting the bond market through recent storms.
Over the weekend, Britain’s new top finance official, Jeremy Hunt, sought to reassure markets, the public and Conservative Party members that he could restore the government’s fiscal credibility. Andrew Bailey, governor of the Bank of England, signaled some renewed confidence in the Exchequer’s new prime minister, Mr Hunt, saying on Saturday they had spoken and had a “mind meeting” on the fiscal sustainability.
On Friday, Prime Minister Liz Truss seeks to end three weeks of financial turmoil ends with a daring plan, announced on September 23, tax cuts of tens of billions of pounds and significantly increased borrowing. The condemnation of this fiscal agenda, which comes at a time of high inflation and rising interest rates, was swift: The pound fell to the low. record low against the dollar and bond yields surged, hitting the UK home mortgage market and triggering a pension fund crisis that led to central bank intervention.
“We need to act now to reassure the markets of our financial discipline,” Ms. Truss said on Friday in firing Kwasi Kwarteng, the prime minister and close ally who had come up with the plan. . She also took the opposite of the second most important tax policy. Ms. Truss said she would drop a plan to block the company’s planned tax rate increase, after having scrapped a plan to abolish the income tax rate for the top earners.
However, at the end of Friday British pound falls and yields on government bonds – a measure of the government’s borrowing costs – rose. The yield on the 30-year bond closed Friday at 4.78%, a full percentage point higher than it was before the September 23 announcement.
Frequently asked questions about inflation
What is inflation? Inflation is one Loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it did today. It is usually expressed by the annual change in prices for everyday goods and services such as food, furniture, clothing, transportation, and toys.
Will these trends continue on Monday? When markets open, it will be the first time in two and a half weeks that the central bank has not bought some government bonds to help ease the liquidity crunch facing pension funds. The bank has bought more than £19 billion of bonds.
How the market reacts will be a test of the government’s efforts to restore calm and the central bank’s attempt to restore order to the bond market. There may be volatility, but the question is whether it is so broad that it is possible to return to the dysfunction that threatened previous financial stability.
Over the weekend there were signs that Mr Hunt, who will serve as a fourth prime minister for months to come, would be willing to abandon many of Ms Truss’ previous financial plans, as he said he was. don’t “skip anything”.
A report in Sunday Times said Mr. Hunt would delay by a year the plan to cut the lowest income tax rate.
“We’re going to have to make some very tough decisions on both spending and taxes,” Mr Hunt said in an interview with the BBCrecorded on Saturdays and aired on Sunday mornings.
“Spending is not going to increase as much as people expect,” he added. “Taxes won’t fall as quickly as people think and some taxes will go up.”
These plans are intended to reduce Britain’s debt levels and have policies fully assessed by the Office for Budget Responsibility, an independent government watchdog, which has apparently been well received by the Bank of England. . On Saturday, Mr Bailey pointed out that things at the Treasury were different now.
“It’s a clear message to everyone, including a clear message from the markets,” he said at a conference in Washington. “I can tell you that there was a very clear and immediate meeting about the importance of stability and sustainability.. “
Despite these reassurances, there is still much uncertainty for investors. It is unclear how long Ms. Truss can hold her position as prime minister; Mr Hunt’s tax, spending and debt relief plans will not be disclosed until October 31; and Britain still faces a series of economic challenges, including high inflation and energy prices, squeezed households and companies warned of a decline in consumer spending. There is also the question of how much bond market performance has improved.
Monday will only bring some answers to these questions.
