Financial markets reacted negatively to reassure investors after Liz Truss announced a U-turn on corporate taxes.
As was widely predicted, the Prime Minister said she is abandoning the government’s commitment to cut the planned tax hike from 19% to 25% – despite it being a key element of her Tory leadership campaign.
speech at a press conferenceMs Truss said she had decided to maintain the surge, a move that would boost public finances by £18bn a year.
But the UK government’s borrowing, which is necessary for major government spending plans, has become more expensive since Ms Truss’ Downing Street announcement, despite earlier more positive market sentiment when news of the tax turn emerged.
Markets had already discounted this by Friday morning as gilt yields, the interest payments on long-dated government bonds, effectively government debt, fell while the pound rose against the dollar and the euro.
The yield on 30-year gilts fell to 4.3% on Friday morning from a high of almost 5% on Thursday after Sky News announced the reversal.
But after Ms. Truss’s speech, the rate began to rise, and as of 4:30 p.m. Friday, the rate had risen to 4.8%.
Similarly, 20-year gilts fell from a high of nearly 5% to 4.42% on Friday, before rebounding slightly to 4.68% following Ms Truss’s speech.
The decline in the benchmark 10-year Treasury yield rate had also been large, falling from 4.3% on Thursday to just over 4% on Friday. That gain was lost late Friday afternoon when the interest rate was at 4.18%.
These gilts are the bonds bought as part of the Bank of England’s unprecedented market intervention to prevent a collapse in pensions as the market doubted the credibility of Britain’s economic plans.
Interest rates had risen sharply following the mini-budget announcement, prompting a massive sell-off before the bank announced its 13-day intervention on September 28th. This intervention ended on Friday afternoon.
Paying for goods in US dollars, as importers do, has also become more expensive as the pound depreciated. Pound falls signal a lack of investor confidence in the UK market.
Overall, however, sterling is buying more US currency on Friday than at any time in the past seven days. On Friday afternoon, £1 bought $1.12.
Markets are also now betting that the Bank of England’s base rate, which drives the cost of borrowing in the UK, will be lower than expected earlier this week.
Interest rates are now forecast at 5.25%, the lowest rate forecast since the inception of the monetary budget and a big drop from the 5.75% priced in by UK money markets on Thursday.
That cut is likely to bring down mortgage rates, which had been rising steadily since the mini-budget announcement when lenders pulled mortgage products from the market, as the Bank of England would not hike rates by a multiple.
There were 3,112 mortgage products on the market as of Friday morning, still fewer than before the mini-budget announcement, but up from a 10-year low of 2,258 available mortgages on Oct. 1.
Mortgage interest rates had risen significantly since the mini-budget date on September 23.
On Friday, the average interest rate for a two-year fixed-rate mortgage was 6.47% and for a five-year fixed-rate mortgage was 6.29%. It’s almost a 2% increase from the average interest rates of 4.74% and 4.75% for two- and five-year fixed-term mortgages that existed before the mini-budget.