UK borrowing costs fall and pound rallies as Hunt brings forward tax and spending plans – business live

There’s speculation that Jeremy Hunt could adjust the government’s energy price cap.

The new chancellor could make the freeze (on the unit cost of energy) more targeted next year, rather than working as a blanket cap for two years. This would lower the cost of the intervention.

Here’s Harry Cole of The Sun:

And Steven Swinford of The Times:

UK bonds are rallying even more strongly ahead of Jeremy Hunt’s announcement of new measures to support fiscal sustainability.

Two-year, 1o-year and 30-year UK bonds have all jumped higher in price, pushing the yield (effectively the interest rate) on these debts lower.

The 30-year gilt is now yielding 4.43%, down from 4.77% on Friday night – that would be a really dramatic fall in long-term debt in normal times.

But it still leaves borrowing costs significantly higher than before the mini-budget (when 30-year bonds yielded 3.5%).

The damage caused to the UK’s credibility in the markets won’t be fixed easily.

Even once Jeremy Hunt has announced further U-turns on Liz Truss’s tax plans today, rebuilding investor confidence will be hard, warns Neil Wilson of Markets.com.

Wilson fears the market ‘seems to have lost faith’ in the UK. Conducting a series of u-turns, under pressure from bond traders, merely makes the government look weak.

Whilst the initial reaction seems to be positive so far this morning, I would question whether credibility can be restored all that quickly – investors don’t want uncertainty – and I would have a general working assumption that the market will seek to test resolve again by pressing on the gilt market.

In a world of declining liquidity and a loss of confidence in institutions, markets tend to seek to inflict maximum pain to the greatest number of market participants.

Even if the government does roll back all measures in the mini-Budget that spooked investors, the market seems to have lost faith and you won’t now get it back easily – completely rowing back every measure makes you look weak and incompetent…rather than headstrong and incompetent.

Wilson adds that there are no good options for Liz Truss. And the underlying economic problems that are weighing on the pound remain – namely inflation, the twin deficits (budget and current account), and weak productivity.

Cutting governent spending and lifting taxes may calm the markets, but it will also push the UK into a deeper downturn.

Kit Juckes, currency expert at French bank Société Générale, says that once the market volatility has receded, we’ll be left with “recession, austerity, higher rates and a lingering sense that this sterling crisis, more than its predecessors, was homemade and avoidable”.

Juckes adds:

Jeremy Hunt will give a statement on fiscal policy at 11 am, before speaking to Parliament this afternoon. He hopes to deliver a clear message that stabilises the gilt market and restores confidence. The measures will include spending cuts and tax increases, which will deepen the economic downturn. That should result in lower gilt yields and a lower peak in policy rates than markets currently discount (implausibly, above 5%).

More importantly perhaps, lower rates (along the length of the curve) would result in lower debt interest costs and improve the OBRs assessment of the long-term outlook. Let’s hope he doesn’t disappoint.

Newsnight’s Ben Chu has a handy chart showing how 30-year bond prices have jumped this morning as Jeremy Hunt prepares to ditch more measures from the mini-budget.

Other government bond prices are also rallying today, but not as strongly as the UK.

For example, US 10-year Treasury bonds have strengthened, pulling down their yield by just 4.5 basis points – while UK 10-year gilts yields are 25 basis points lower.

That further shows that it was domestic factors that hammered UK asset prices and pushed up borrowing costs, not merely international pressures as ministers had tried to claim.

This has narrowed the gap between UK and US government bond prices (and thus the spread in the yield between the two securities).

Before the mini-budget, US government debt traded at a higher yield (reflecting the fact that American interest rates had been raised faster). But once the mini-budget sent gilts crashing, UK debt yielded more:

Analyst: Government has bought itself valuable time by tearing up mini-budget

The financial markets will want to see “clear evidence” that Jeremy Hunt is rolling back the unfunded tax cuts that caused the loss of confidence in the UK, explains Stephen Innes, managing partner at SPI Asset Management:

More broadly, the UK situation highlights the increasing divergence between governments and central banks, with the latter tightening to contain inflation at the expense of economic growth.

In contrast, governments respond to voter pressure to alleviate rising prices, typically through easing fiscal policy.

Meanwhile, UK Prime Minister Liz Truss’s time in office looks increasingly short as several Conservative MPs have openly called for her removal given her handling of the mini-budget culminating in a disastrous speech last Friday. The power most certainly lies with number 11 in the short term, although markets will want to see clear evidence of a rollback of unfunded tax cuts.

By calming the market today, Jeremy Hunt could succeed in reducing the estimated size of the fiscal black hole he needs to fill in the medium-term fiscal plan due on 31 October.

That’s because the Office for Budget Responsibility will use current borrowing costs, and interest rate forecasts, when assessing the UK’s economic outlook.

Economics journalist and author Duncan Weldon explains:

The unravelling of the mini-budget means UK interest rates may not rise quite as sharply as the markets had previously expected.

The money markets are now pricing in the Bank of England raises rates to around 5.25% by next May.

Earlier this month, rates were seen hitting 6% by next summer, with the Bank expected to tighten policy aggressively to cool inflation.

Rates are currently 2.25%, with the BoE signalling to expect a significant rise at its meeting next month.

As accountancy professor Lord Prem Sikka points out, higher rates will eat into mortgage-holders’ disposable income, push down prices, and create more financial distress: