Pound Plunges as Debt Prices Rise: How Markets Reacted to Kwarteng’s Growth Plan

Kwasi Kwarteng’s speech to the House of Commons today lasted 25 minutes and 16 seconds and in it he committed to an additional £72.4 billion in borrowing. For every second the Chancellor spoke, the UK committed itself to £48m in new debt.

But even before Shadow Chancellor Rachel Reeves had started speaking, the cost of the fiscal event had risen higher as markets reacted to the announcement. UK government bond prices, known as gilts, fell and yields (the premium the government pays on debt) on five- and 10-year bonds rose sharply after the announcement, reflecting the huge borrowing the government plans to can increase even more expensive. The difference between the cost of borrowing (over a 10-year bond) from the UK government and the German state has become wider than at any time in more than 20 years.

The pound, already pushed to a 37-year low by market expectations of a recession, fell sharply against both the dollar and the euro, hitting $1.10 about an hour after Kwarteng’s speech. The price of options contracts is now forecasting a 17 percent chance that the pound and dollar will reach parity this year.

The FTSE 100 index with a market capitalization of 1.9 trillion £ also fell. At the time of writing, the UK’s 100 largest companies had collectively lost about 2 per cent of their market value.

The scale of the market reaction has partly to do with the sheer size of the announced measures, which include £45bn in tax cuts and an energy pricing plan that will cost £10bn a month. Paul Johnson, director of the Institute for Fiscal Studies, commented that markets were “terrified”. [the] Scope of tax gift”.

Select and enter your email address

call in the morning

Quick and essential guide to domestic and world politics from the New Statesman’s politics team.

the crash

A weekly newsletter to help you piece together the pieces of the global economic slowdown.

world review

The New Statesman’s Global Affairs Newsletter, every Monday and Friday.

The New Statesman Daily

The best of The New Statesman, delivered to your inbox every weekday morning.

green times

The New Statesman’s weekly environmental email on the politics, business and culture of the climate and natural crisis – delivered to your inbox every Thursday.

The culture department

Our weekly culture newsletter – from books and art to pop culture and memes – is sent out every Friday.

Weekly Highlights

A weekly round-up of some of the best articles from the latest issue of The New Statesman, mailed every Saturday.

ideas and letters

A newsletter with the best writings from the ideas department and the NS archive on political ideas, philosophy, criticism and intellectual history – sent out every Wednesday.

events and offers

Sign up to receive information about NS events, subscription offers and product updates.

  • administrative office
  • Arts and Culture
  • board member
  • Business / Business Services
  • Client / Customer Service
  • communication
  • Construction, works, engineering
  • Education, curriculum and teaching
  • Environment, Conservation and NRM
  • Management and maintenance of facilities/sites
  • financial management
  • Health – Medical and Nursing Management
  • Personnel, training and organizational development
  • Information and communicationtechnology
  • Information services, statistics, records, archives
  • Infrastructure management – traffic, utilities
  • lawyers and practitioners
  • Librarians and library management
  • management
  • marketing
  • OH&S, risk management
  • operational management
  • Planning, policy, strategy
  • Print, Design, Publish, Web
  • Projects, programs and consultants
  • Property, asset and fleet management
  • public relations and media
  • Purchasing and Procurement
  • quality management
  • Scientific and technical research and development
  • Security and Law Enforcement
  • service delivery
  • sport and freetime
  • Travel, accommodation, tourism
  • Wellbeing, Community/Social Services

Overall, however, it is also an indication of investor confidence in the UK economy and the extent to which market participants believe the government’s tax cuts will deliver the promised GDP growth.

Content from our partners

build Britain

Why decarbonization is key to energy security

Make the UK a nation of savers

Samuel Tombs, chief economist at Pantheon Macroeconomics, commented that GDP growth from the promised measures, which include scrapping the 45 per cent personal income tax rate on earnings over £150,000, will be “relatively modest considering the biggest winners are high earners whose spending is less sensitive to changes in their income. In fact, these households are already cash rich, having saved unusually large sums during the pandemic.”

The market reaction also suggests that investors are anticipating higher interest rates. In a note describing the mini-budget as “a perfect storm for UK gilts and forex,” economists at Dutch bank ING said that “the recent jump in [gilt] Yields imply that [the] Bank rates will peak well over 5 percent next year.”

Some measures were welcomed by companies as promoting growth. Shevaun Haviland, Director-General of the UK Chambers of Commerce, commented that the reversal of social security contributions and the removal of the IR35 payroll rule “should boost economic growth, ease cost pressures and encourage investment”.

However, Haviland also concluded, “All eyes will now turn to the Office of Budget Responsibility (OBR) forecasts in the fall for reassuring public finances.” Investors and companies have had to make up their own minds about the likely impact of the today’s fiscal event after the Treasury Department refused to release the OBR’s analysis of conditions in an economy that has changed significantly since the OBR’s last forecast in March. This will only have made the market’s reaction to the already highly controversial (and by no means small) mini-budget even more volatile.

[See also: Liz Truss has taken the biggest ideological gamble for 40 years]

Leave a Comment