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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

IMF steps up criticism of mini-budget after ‘disorderly’ rise in borrowing costs – as it happened

Bank of England IFS United Kingdom England Kwasi Kwarteng Rupert Harrison Institute for Fiscal Studies International Monetary Fund
Tobias Adrian, second from left, speaking at a news conference on the IMF's Global Financial Stability Report
Tobias Adrian, second from left, speaking at a news conference on the IMF's Global Financial Stability Report Photograph: Patrick Semansky/AP

Closing summary

That’s all for today, after a busy, and worrysome session.

The IMF has suggested the government should change course over the mini-budget, the IFS warned of a £62bn black hole in the UK public finances finances, and the Bank of England was forced to broaden its attempts to keep order in the markets.

Consumers have been hit by rising grocery costs, leading some families to buy cheaper products such as own-brand goods and ‘wonky’ fruit and veg, while petrol prices are on the rise again.

A sharp rise in the number of people unable to work due to illness has pulled the unemployment rate down.

Stock markets had a bad day as the IMF cut its growth forecasts.

And long-dated UK bond yields have risen again – the 30-year gilt is yielding almost 4.8% tonight, the highest since the Bank of England began its attempts to cool the panic.

Here’s today’s main stories:

Updated

The crisis in the pensions sector over the use of liability-driven investing (LDI) schemes to hedge risks shows how the City never seems equipped to handle the next big financial hazard, my colleague Phillip Inman writes.

He points out that former Bank of England chief economist Andy Haldane warned in 2014 that financial activity will migrate outside the banking system, creating new risks which are now playing out.

And the Bank’s efforts to stem the panic is also causing confusion, he adds:

Most analysts have accused Kwasi Kwarteng of triggering the chaos with his mini-budget. But investors have also been spooked by the Bank of England’s attempts to go back to a more normal world – one where it stops printing money through quantitative easing, a mainstay of economic policy since the financial crisis, and prepares to sell back to investors all that government debt it has bought.

The markets are spooked because the Bank has delayed the start of a programme to sell £100bn of government bonds, but not withdrawn it. Winding back quantitative easing would mean the Bank is both buying government bonds – to help pension funds – and selling them.

Until Threadneedle Street ends this obvious contradiction, another embarrassing episode is set to be added to British financial history. Until the regulators seek out risk wherever they find it, these financial blow-ups are going to continue.

Back in parliament, Labour’s Rachel Reeves accused Kwasi Kwarteng of being in ‘dangerous state of denial’ over the impact of mini-budget.

My colleague Andrew Sparrow has the details:

Reeves, the shadow chancellor, asks if Kwarteng and his team are the last people on earth who think the growth plan is working.

Kwarteng says the IMF has said the tax cuts will boost growth. He accuses Labour of being part of the anti-growth coalition.

Reeves says Kwarteng is in a “dangerous state of denial”. Mortgages could go up by £500 per month. Will the chancellor reverse the budget?

Kwarteng challenges Labour to say which tax cuts it would reverse. And he says Reeves should get her facts right. The IMF says the tax cuts will help growth*, he says.

* reminder, the Fund says the mini-budget will “lift growth somewhat above the forecast in the near term”, but also make it harder to fight inflation (meaning higher interest rates, which slows growth).

Markets close in the red

Another bad day in the City has ended with blue-chip stocks in the red.

The FTSE 100 index has closed 74 points lower at 6885 points, down 1% today.

Worries about a global downturn, turbulence in the UK bond market, the Ukraine war, and rising Covid cases in China all hit stocks.

Online grocer Ocado was the top faller, down 5%, as tech stocks were hit by expectations of further interest rate rises. Pension providers and other financila stocks suffered from worries about the gilt markets, while miners and oil companies were hit by recession fears.

Michael Hewson of CMC Markets sums up the day:

Today’s mood on European markets has been a predominantly downbeat one, with weakness in Asia translating into a negative open, as concerns over slowing global growth and persistently higher inflation, kept up the pressure on valuations.

Losses accelerated as US markets opened with the IMF adding to the negative tone by downgrading its global growth forecast for next year to 2.7%, while admitting that its target could fall further if economic conditions continue to deteriorate. Its chief economist Pierre Olivier Gourinchas said the worst is yet to come, and that 2023 could be a very bad year. The fund also warned that inflation is set to rise further and could peak sometime later this year, suggesting the need for more rate rises.

A rise in covid cases in China also weighing on risk appetite with the usual suspects of basic resources and energy acting as the largest drag, as concerns over a possible global recession weigh on risk.

Amongst the biggest fallers on the UK market have been the likes of Legal & General, Aviva and Prudential after the Bank of England intervened further in UK government debt markets. Their warnings of market dysfunction, while driving yields lower is making investors a little more nervous about this area of the market. Asset managers are also lower with St. James Place and Hargreaves Lansdown near the bottom of the UK index.

IMF steps up criticism of mini-budget, saying 'change of policy' would change yields

The IMF has stepped up its criticism of Kwarteng’s mini-budget, saying it contributed to disorderly markets.

Tobias Adrian, the Fund’s Financial Counsellor, says the fiscal statement last month had led to perceptions that the Bank of England would need to raise rates higher to fight inflation, and that a different fiscal policy would take pressure off the Bank.

Adrian has told a press conference at the IMF’s Annual Conference in Washington DC that some of the rise in interest rates has been “disorderly”, while the “rapid” increase in gilt yields that forced the Bank to act.

Adrain said:

“A change in fiscal policy would change the trajectory of interest rates going forward.

The change in fiscal policy changed the expectations of monetary policy and meant the Bank of England would have to raise interest rates that much more to bring inflation back to its mandated target.”

Adrian’s comments follow the IMF’s warning that Kwasi Kwarteng’s mini-budget would make it harder to fight inflation, while also lifting growth in the near-term….

…and the warning that central banks tightening monetary policy as governments cut taxes is like “having a car with two people in the front”, battling for the wheel.

Updated

The Bank of England has bought £1.363bn of conventional long-dated UK government bonds, in its latest daily operation to calm markets.

That’s on top of the £1.9bn of inflation-linked gilts it bought from investors (see earlier post) and means the central bank has stepped up the pace of its efforts to keep markets functioning.

Confirmation that the Bank of England’s latest intervention hasn’t calmed markets much:

Updated

Back in parliament, Kwasi Kwarteng has said the government is committed to work with regulators to understand what has happened to the market for long-dated British government bonds in recent weeks.

Kwarteng told MPs:

“We will be absolutely committed to getting to the bottom of what’s happened in the …long-dated gilt market where it’s been over-levered over the last few weeks.”

That ‘over-leverage’ was driven by pension funds who had used LDI strategies to (they thought) protect themselves from adverse moves in interest rates. They faced energency collateral calls on those contracts when bond prices fell, triggering a sell-off that risked a ‘doom loop’.

But the trigger was the shock of Kwargent’s £45bn of unexpected tax cuts, without a credible plan to pay for them, during the worst year for bonds in decades, and when rising inflation was already pushing up interest rates.

GAM: Faith in Kwarteng's competence couldn't get any lower

Kwasi Kwarteng has destroyed his ‘fiscal credibility’, while the Bank of England’s monetary credibility is also at risk as it tries to maintain order in the bond market.

That’s the damning verdict of Charles Hepworth, investment director at GAM Investments, who warns that the markets still don’t believe the mini-budget is sustainable.

Hepworth says:

“Having been forced to step into the gilts market last month, The Bank of England has had to again foray into the index-linked end of the market as prices in these bonds come under ever increasing pressure. Having destroyed all fiscal credibility, Chancellor Kwarteng’s budget is still viewed by markets as unsustainable.

Even with his fiscal plan and the OBR’s economic forecast announcement being hastily brought forward early to October 31st, faith in his competence couldn’t get any lower.

“While the Bank of England had to state today that threats of ‘fire sales’ in the gilt market pose a risk to UK financial stability, this acknowledgement cannot be what the government wants to hear. Markets similarly are behaving in a fait accompli fashion, suggesting the BoE has limited tools to avert these ‘fire sales’.

The UK’s 30-year bond is down 23% over the last month, and it is now close to where it fell to just before the Bank was forced to intervene, suggesting monetary credibility is close to being lost. This needs to be sorted as soon as possible or wider cracks will start to build, but credibility is very difficult to restore once lost.”

The Bank of England has bought almost £2bn of inflation-linked bonds today, hours after adding them to its emergency purchase operation.

The BoE accepted offers for £1.947bn of index-linked gilts, and rejected £466m of other offers [under the auction, it can choose which offers to accept to maintain orderly markets].

That’s a step-up in its bond buying. Until this week, the BoE had only bought £5bn of bonds in total, despite having a daily limit of £5bn (raised to £10bn yesterday).

Prices of long-dated linker bonds mostly turned negative on the day after the results of the operation were announced, Reuters reports.

Updated

Over in parliament, Chancellor Kwasi Kwarteng has been facing MPs for the first time since his mini-budget caused mayhem in the markets, at Treasury questions.

Mel Stride, the Conservative chair of the Commons Treasury committee, suggested to Kwarteng that he should only announce measures in his fiscal plan due on 31 October if he is confident that he will be able to get them through the house.

Kwarteng replied that:

“We will and should canvass opinion widely ahead of the publication of the plan.”

The chancellor also said Stride is doing a “brilliant job” and has offered “wise counsel”.

However, our Politics Live blogger Andrew Sparrow reports that Kwarteng does not sound 100% sincere at this point – as Stride has been one of his strongest Tory critics.

There’s full coverage here:

Meanwhile in the UK retail world, Frasers is stretching its interest in online fashion into new territories with a the purchase of a 4.5% stake in N Brown.

N Brown owns JD Williams, which is aimed at older shoppers, Simply Be, which offers larger sizes, and Jacamo for taller men.

N Brown’s shares have tumbled in the past year but ticked up on Tuesday on news of Frasers’ interest. Frasers, which owns Sports Direct, House of Fraser and Flannels, has recently bought ailing online brands including Missguided, I Saw it First and Studio Retail.

IMF: Fiscal policy should match Bank of England's goals

IMF chief economist Pierre-Olivier Gourinchas has told a press conference in Washington that the UK government should align its tax and spending policy with the Bank of England’s inflation-fighting goals.

Gourinchas points out that we have seen ‘a lot of turbulence’ in the market for UK debt, which shows the importance of keeping fiscal and monetary policy in line.

As he puts it:

“Central banks are trying to tighten monetary policy, and if you have at the same time fiscal authorities that try to stimulate aggregate demand, it’s like having a car with two people in the front ... each trying to steer the car in a different direction. That’s not going to work very well.”

Gourinchas welcomes Monday’s decision to

Updated

IMF warns against energy price caps

The IMF has criticised energy price caps introduced by countries including the UK, saying such interventions ‘rarely work’.

The Fund warns that the energy crisis, especially in Europe, is not a transitory shock.

Instead the geopolitical realignment of energy supplies in the wake of the war is broad and permanent, meaning the situation will be worse in a year’s time.

IMF chief economist Pierre-Olivier Gourinchas say governments should offer targeted help, while letting rising prices cut demand.

Winter 2022 will be challenging, but winter 2023 will likely be worse. Price signals will be essential to curb energy demand and stimulate supply.

Price controls, untargeted subsidies, or export bans are fiscally costly and lead to excess demand, undersupply, misallocation, and rationing. They rarely work. Fiscal policy should instead aim to protect the most vulnerable through targeted and temporary transfers.

Updated

The IMF expects particularly weak growth in the eurozone next year, saying:

In the United States, the tightening of monetary and financial conditions will slow growth to 1 percent next year. In China, we have lowered next year’s growth forecast to 4.4 percent due to a weakening property sector and continued lockdowns.

The slowdown is most pronounced in the euro area, where the energy crisis caused by the war will continue to take a heavy toll, reducing growth to 0.5 percent in 2023.

Almost everywhere, rapidly rising prices, especially of food and energy, are causing serious hardship for households, particularly for the poor.

IMF criticises Kwarteng again over tax cuts and energy package

Kwasi Kwarteng has come under fresh fire from the International Monetary Fund after the Washington-based organisation said his tax cuts and energy support package had made the Bank of England’s battle against inflation more difficult.

The IMF used its prestigious world economic outlook (WEO) to criticise the scale of the stimulus provided by the chancellor and the blanket nature of the price cap on gas and electricity bills, our economics editor Larry Elliott reports from Washington DC.

It said the UK was on course for a sizeable slowdown in growth from 3.6% this year to 0.3% in 2023 but said its forecasts had been made before Kwarteng delivered his mini-budget on 23 September.

The IMF said:

“The fiscal package is expected to lift growth somewhat above the forecast in the near term, while complicating the fight against inflation.

Financial markets expect Threadneedle Street to raise interest rates – currently at 2.25% – by at least 0.75 percentage points at its next meeting in early November.

The WEO noted the hostile market reaction to Kwarteng’s September package, which forced the Bank of England to announce emergency measures to halt a run on pension funds.

It said:

“In the United Kingdom, the announcement in September of large debt-financed fiscal loosening, including tax cuts and measures to deal with the high energy prices, was associated with a rise in gilt yields and a sharp currency depreciation that was later reversed.”.

Here’s the full story:

The IMF also warns that inflation pressures are proving broader and more persistent than anticipated, despite the economic slowdown.

Global inflation is now expected to peak at 9.5% this year, and drop to 4.1% by 2024.

IMF chief economist Pierre-Olivier Gourinchas says central banks must stay firmly focused on taming inflation, despite the risks of creating a deeper recession:

Over-tightening risks pushing the global economy into an unnecessarily severe recession. Financial markets may also struggle with overly rapid tightening.

Yet, the costs of these policy mistakes are not symmetric. The hard-won credibility of central banks could be undermined if they misjudge yet again the stubborn persistence of inflation. This would prove much more detrimental to future macroeconomic stability.

IMF warns 'worst is yet to come' as it cuts 2023 growth forecasts

The International Monetary Fund has cut its global growth forecasts for next year, and warned that the worst is yet to come.

In its latest World Economic Outlook, just released, the IMF warned that conditions could worsen significantly year, as countries are hit by the disruption from the Ukraine war, high energy and food prices, inflation and sharply higher interest rates.

The IMF predicts that global GDP growth next year will slow to 2.7%, compared to a 2.9% forecast in July, and down from 3.2% expected this year.

One-third of the world economy will likely contract this year or next amid shrinking real incomes and rising prices, it fears.

IMF chief economist Pierre-Olivier Gourinchas said in a statement:

The three largest economies, the United States, China, and the euro area will continue to stall.

Overall, this year’s shocks will re-open economic wounds that were only partially healed post-pandemic.

In short, the worst is yet to come and, for many people, 2023 will feel like a recession.

The IMF put a 25% probability of global growth falling below 2% next year - a phenomenon that has occurred only five times since 1970 - and said there was a more than 10% chance of a global GDP contraction.

A “plausible combination of shocks” including a 30% spike in oil prices from current levels could darken the outlook considerably, the IMF said, pushing global growth down to 1.0% next year - a level associated with widely falling real incomes.

Updated

Investors fear more volalility in run-up to Halloween debt-cutting plan

Investors are warning that the markets will remain volatile ahead of Kwasi Kwarteng’s announcement of his medium-term debt reduction plan on 31 October.

Richard Carter, head of fixed interest research at Quilter Cheviot, says the Bank of England faces an ‘incredibly difficult balancing act’, after it said today it would start buying inflation-linked bonds, a day after doubling the maximum size of its daily purchases from £5bn to £10bn.

“This morning the Bank of England has once again felt the need to intervene in the fixed income market following yesterday’s announcement as it seeks to calm nerves and return stability to government bond markets. We are in somewhat unprecedented territory here and as a result yields continue to climb higher as investor fears are yet to be eased.

“The move by the BoE today to include index-linked gilts in their emergency quantitative easing programme is probably sensible given the massive rise in yields that occurred yesterday, however, it is going to be an incredibly difficult balancing act at a time when the Bank wants to be raising interest rates in order to bring inflation down.

It is stuck between a rock and the hard place in combatting inflation at the same time as fiscal policy causes shockwaves in markets. As a result, we expect gilt markets to remain volatile ahead of the Chancellor’s fiscal plan speech at the end of the month and potentially beyond as it remains to be seen how effective the government’s growth plan will be.”

Sandra Holdsworth, UK head of rates at Aegon Asset Management, told the FT that:

“Two interventions in 24 hours is pretty extraordinary,”

Holdsworth added that the BoE’s steps showed how the problem in the pension industry was “much bigger than anyone thought a week ago”.

Economist George Magnus doesn’t believe the government will be able to press on with its current economic plan, given the state of the markets and the economy:

James Athey, investment director at abrdn, warns that the Bank of England may have ‘trapped’ itself in its bond-buying programme.

“The Bank of England and government have inadvertently combined to put themselves, the UK economy and most dramatically UK financial markets in a perilous and uncertain position. While the medium term wisdom of providing significant fiscal support to the UK economy can be debated, doing so at a time of such heightened volatility in markets and with inflation still raging seems quite obviously ill-advised.

“The Bank has been far too intransigent in its response to the inflationary backdrop this year. In being so it laid some of the foundations for the illiquidity and volatility which characterise the UK government bond market today. Their decisions now are even more fraught as a lack of aggression will be perceived as weakness while an over-enthusiastic response could be seen as panic.

“Their recent attempts to deal with weakness and volatility in UK asset markets, ably assisted by the pernicious impact of excess and unwise leverage in the LDI sector, are but mere sticking plasters.

“As ever though the maxim will hold true – there is nothing so permanent as a temporary government program and the risk for the Bank is that they have already trapped themselves into a program of asset purchases at a time where their mandate dictates they should be withdrawing liquidity to tighten policy.

The announced deadline for these temporary gilt purchases is drawing near and neither weakness nor volatility have meaningfully subsided in the gilt market. The next few days are likely to be a rollercoaster whatever the technocrats in Threadneedle Street decide.”

A distressed bond market, and a wayward government, will make it harder for the Bank of England to end its support for long-dated bonds.

So writes Neil Unmack of Reuters Breakingviews, who explains that BoE governor Andrew Bailey is being drawn into a ‘risky game of financial whac-a-mole’ as it tries to calm panic in the markets.

Bailey has consistently had to expand support since late September. On Tuesday, he moved to buy index-linked bonds, and delayed long-planned sales of corporate debt from the bank’s old pandemic-era interventions.

There are plenty of signs that the bond market remains distressed. UK 10-year gilt yields, which have so far not been in the bank’s sights, surged around 30 basis points on Monday. The gap between the price at which banks will buy and sell gilts is above 5 basis points, up fivefold from a year ago, according to ING analysts.

Company borrowing costs are surging too: even low-risk investment grade UK corporate bond yields exceeded 7% on Monday, according to an ICE Bank of America index, which was more than 1.5 percentage points higher than before Truss’s so-called mini-budget.

So with Kwasi Kwarteng facing a £62bn black hole in the public finances due to his unfunded tax cuts, which could require ‘politically implausible’ spending cuts, investors may continue to steer clear of UK gilts if they can’t see a credible fiscal strategy.

Here’s the full piece.

The picture in the bond market remains troubling – despite the Bank of England beefing up its emergency support package twice in two days.

UK 30-year gilt yields now flat on the day, after Monday’s alarming surge.

Updated

The IFS have written a Twitter thread, showing how around £60bn of spending cuts would be needed to stabilise debt as a share of national income in 2026–27, due to weak growth, rising inflation, and the government’s unfunded tax cuts.

The IFS has been outlining how Kwasi Kwarteng’s tax-cutting mini-budget will drive up the national debt.

The IFS calculates that borrowing this year is likely to hit almost £200bn, its third-highest peak since the war, roughly double the £99bn forecast by the OBR in March.

Part of this surge is due to the government’s vast energy support package, but borrowing is still set to remain substantially elevated once those caps on the price of energy end.

The IFS says there is ‘huge uncertainty’ around the exact details, but its central forecast is for borrowing to still be around £100bn in 2026–27, around £70 billion higher than forecast in March.

It says:

Much of this increase is uncertain – it will in particular depend on the path of the economy, inflation and interest rates.

Less uncertain is £43bn of the increase in borrowing, which is explained by the direct impact of the permanent tax cuts announced by the new Chancellor, Kwasi Kwarteng.

Rising debt interest payments will also push up spending, with the government now having to pay higher yields to sell its debt.

But there’s also the ‘credibility cost’ of announcing unfunded tax cuts, alarming the markets, as Sky News’s Ed Conway reports:

Citigroup, which contributes economic forecasts for the Green Budget, predicts that real-terms GDP will rise by just 0.8% per year over the next five years, a very weak preformance.

Inflation is to peak at just under 12% over the coming months, and fall back only gradually, as the cost of living crisis grinds on.

Chief UK economist Benjamin Nabarro says there are few easy policy answers to the UK’s difficult economic outlook

Over the coming months, the terms-of-trade shock associated with the conflict in Ukraine will squeeze both firms and households. For the former, the regressive nature of the hit increases the macroeconomic risks.

The medium-term outlook for investment remains strikingly weak. Aggressive monetary tightening suggests any meaningful recovery is likely to be pushed into 2025.

In another blow to households, petrol and diesel prices at the pumps have started to rise again.

The AA reports that prices have turned higher, after more than three months of falls.

Petrol cost an average of 162.78p a litre yesterday, up from 162.32p/litre in the middle of last week.

Diesel on UK forecourts is also on the climb again, rising to 182.17p a litre from 180.28p/litre last Wednesday.

The increases follow a rise in wholesale fuel costs, as this chart shows:

The wholesale price of Petrol
The wholesale price of Petrol Photograph: The AA

The AA says the turnaround comes after oil producing countries in Opec+ cut output to boost the value of crude, adding close to $10 to the cost of a barrel, adding:

At the same time, refinery strikes in France took 60% of their capacity offline, squeezed market supply of the two fuels and pushed up wholesale costs:

A spokesperson for Liz Truss has said it’s up to the Bank of England whether it ends its bond-buying scheme on Friday as planned, Reuters reports.

Here’s the story:

The Bank of England’s additional measures to buy inflation-linked debt until the end of this week will support an orderly end to its temporary gilt purchase scheme, a spokesperson for British Prime Minister Liz Truss said on Tuesday.

“The additional measures today will support an orderly end to the Bank of England’s temporary purchase scheme. We see it as in line with its financial stability objective and we are in regular contact with the bank who will closely monitor the markets in the coming days,” the spokesperson told reporters.

Asked whether the temporary purchase scheme would end on 14 October as planned, the spokesperson said it was a matter for the independent central bank.

Mortgage rates keep climbing over 6%

Average two and five-year fixed mortgage rates have continued to rise to their highest levels in over a decade, as lenders reprice offers following the mini-budget.

The average two-year fixed mortgage on the market on Tuesday now had a rate of 6.43%, according to Moneyfacts.co.uk, the highest since August 2008 (just before the collapse of Lehman Brothers in the financial crisis).

The average five-year fixed-rate has risen too, to 6.29%, the highest level since November 2008.

These higher rates will price some new buyers out of the market, and push up the cost of remorgaging by several hundred pounds per month.

UK forced to borrow at highest rate since financial crisis

The UK has sold £900m of inflation-linked bonds, but had to agree to pay the highest interest rate since the financial crisis.

This morning’s auction of an index-linked gilt attracted almost three times as many offers, but the successful investors will receive a yield of 1.5% each year on top of the RPI inflation rate.

That’s the highest since October 2008, Reuters reports.

Updated

This chart shows how the price of a 50-year UK government bond has fallen sharply over the last year:

Reminder: The Bank of England warned this morning that the UK still risks a “self-reinforcing ‘fire sale’”, if pension funds are forced to sell bonds due to tumbling prices.

It explained:

The purpose of these operations is to enable LDI [pension] funds to address risks to their resilience from volatility in the long-dated gilt market. LDI funds have made substantial progress in doing so over the past week.

However, the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.

Many pension funds want BoE to extend its support

Many pension funds want the Bank of England to extend its support for the UK government bond market beyond its cut-off date of 14 October, the industry trade body says.

The Pensions and Lifetime Savings Association has welcomed today’s BoE’s decision to start buying inflation-linked bonds on top of other gilts, calling it a “positive additional intervention” in its attempt to keep the market operating in an orderly way.

But, the PLSA also warns that many funds are worried about what happens after Friday, when the Bank is due to end its daily bond purchases.

It says some funds want the support extended until Kwasi Kwarteng has revealed his medium-term fiscal plan at the end of the month.

Following this morning’s and yesterday’s statements by the Bank of England, we will further assess with our members whether they believe any additional actions are necessary to achieve orderly markets.

However, a key concern of pension funds since the Bank of England’s intervention has been that the period of purchasing should not be ended too soon, for example, many feel it should be extended to the next fiscal event on 31 October and possibly beyond, or if purchasing is ended, that additional measures should be put in place to manage market volatility.

With this in mind, we welcome that the Bank of England itself stated last week, that “it intends to unwind its gilt operation in a smooth and orderly fashion” and only “once risks to market functioning are judged by the Bank to have subsided”.

The PLSA also points out that the Bank’s early intervention was “generally effective” in helping bond prices recover (bringing down yields) meaning it only bought up £5bn of bonds so far, from a facility of £65bn.

“Recent days have, however, shown that market confidence remains low”, it adds.

The PLSA is also urging pension funds to take steps now to re-balance portfolios and protect their strategies in uncertain times.

Updated

World markets head for two-year lows

World stock markets are heading towards their lowest levels in almost two years, as worries about rising interest rates and an escalation in the Ukraine war grip markets.

Covid fears are also rising, after some Chinese cities imposed fresh lockdowns and travel restrictions after a rise in infections following last week’s National Day holiday (details here).

In London, the FTSE 100 has lost 1.2% or 82 points to 6876, with mining companies and oil companies hit by the prospect of recession.

Pension firms are also in the fallers

Victoria Scholar, head of investment, interactive investor says,

“European markets have opened in the red with the FTSE 100 leading the declines.

Legal & General and Aviva are trading at the bottom of the UK basket shedding more than 3% each after the Bank of England extended its gilt market stabilisation measures, putting pressure on financial and insurance stocks.”

Other European markets are also in the red, after Japan’s Nikkei shed 2.6%. This has pulled MSCI’s world stock index towards its lowest since November 2020.

The MSCI All Country World Index of stocks
The MSCI All Country World Index of stocks Photograph: Refinitiv

The small recovery in long-term UK government bond prices this morning is fading.

The yield on 30-year gilts has reversed its early fall, and is now slightly higher at 4.72%, up from 4.7% last night, and 4.6% earlier this morning.

Joshua Raymond, director at online investment platform XTB.com, says the BoE’s decision to start buying inflation-linked bonds shows the severity of the situation:

“With each move by the BoE to restore stability in the gilt market, the more serious market participants realise the problem facing UK financial security. Yesterday we saw the BoE double auction liquidity levels. Today they’ve widened the asset list to include index linked gilts.

The last few days of trading have seen Long term UK bond yields rising fast back towards levels before the BoE started to intervene. That tells you there’s a dislocation between the BoEs actions and investor confidence. Either the market believes the BoEs actions are too small and too temporary or there’s a serious lack of confidence in UK public finances. In all likelihood, it’s probably both and that’s very troubling for the medium term.”

This morning’s jobs report also showed that the number of people in employment fell by 109,000 in June-August, to 32.75m.

That pulled the UK employment rate down to 75.5%, from 75.8%.

But with unemployment rate falling to another post-1970s low of 3.5%, and wage growth accelerating (but still below inflation), today’s report won’t stop the Bank of England hiking interest rates sharply next month, predicts James Smith, ING’s developed markets economist.

Smith believes the Bank could raise interest rates by a full percentage point, from 2.25% to 3.25%.

The bottom line is that if the Bank of England wants to act forcefully at its November meeting, then these jobs figures aren’t likely to stop it. Instead, whether we get a 75bp or 100bp move depends on wider market conditions – in which the BoE’s bond purchases are important – and whether the government is able to reassure investors on debt sustainability.

“Ministers have brought forward their Medium-Term Fiscal Plan to 31 October, and markets will be looking for bold action to reduce planned debt issuance over the next couple of years. We’re closely watching reports that the government is re-considering a form of revenue cap/windfall tax on certain energy providers.

“If markets are calmer going into the November BoE meeting, then the BoE will more likely opt for a 75bp hike. But if volatile markets persist, and the pound weakens further, the Bank will be under a lot of pressure to act. We’re therefore pencilling in a 100bp hike for the time being.”

Grocery inflation hits record, driving customers to ‘wonky’ fruit and veg

A Morrisons wonky vegetable box

Grocery price inflation hits a new record high, spurring cash-conscious shoppers to buy cheaper, ‘wonky’ fruit and vegetables to cut bill.

Data provider Kantar reports that grocery inflation surged to 13.9% in September, the highest level since the survey began in 2008.

That would add just over £3 to the average shopping trip of £21.89 last year. On an annual basis, shopping bills would rise by £643, to £5,265, if people kept buying the same items.

But faced with these soaring prices, customers have turned to cheaper alternatives like supermarkets’ own label goods….and packets of misshapen food.

Kantar’s Fraser McKevitt explains:

People are pretty savvy at seeking out best value and retailers are expanding their ranges to help them do this. We have seen grocers making a virtue of visually imperfect fruit and vegetables in recent years, allowing them to carry on offering the fresh products consumers want but at a cheaper price.

Many shoppers have been converted and sales of ranges like Tesco Perfectly Imperfect or Morrisons Naturally Wonky were up collectively by 38% this month.

Updated

Here’s our news story on how the rise in long-term sickness has pulled down the unemployment rate:

Updated

Here’s the chart showing how public sector pay has lagged behind private sector workers, showing the difficulty in making spending cuts on the scale needed to pay for Kwasi Kwarteng’s tax cuts.

UK real wages continue falling

UK wages continued to lag inflation over the summer, leaving workers with real terms pay cuts.

Regular pay (excluding bonuses) rose by 5.4% per year in June-August, the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic.

Total pay (including bonuses) rose by 6.0% per year in June-August, up from 5.5% a month ago.

With UK consumer price inflation running at 9.9% in August, that means real pay fell.

This was particularly acute in the public sector, where average regular pay rose by 2.2%, compared with 6.2% in the private sector.

The ONS also reports that the number of job vacancies in July to September 2022 fell by 46,000, to 1,246,000, the third consecutive quarterly fall.

Rise in long-term illness hits UK jobs market

The UK’s unemployment rate has fallen to its lowest since 1974, driven by a record number of people leaving the jobs market.

The number of people classed as inactive - neither in work nor looking for it - rose by 252,000 in the three months to August. That’s the biggest such increase since records began in 1971, the Office for National Statistics reports.

And worryingly, the number of people economically inactive because they are long-term sick increased to a record high.

It pushed up the UK’s economic inactivity rate up to 21.7%, which is 1.4 percentage points higher than before the pandemic.

It also nudged the unemployment rate down to 3.5%, the lowest since 1974, and pushe down the number of unemployed people per vacancy to a record low of 0.9 in June-August.

The ONS reports that the fall in available workers was largely driven by those who are long-term sick or because they are students, with the biggest increases in the 50-64 and 16-24 ranges.

A British Airways Airbus taking off from Heathrow Airport.
A British Airways Airbus taking off from Heathrow Airport. Photograph: Steve Parsons/PA

In other news, Heathrow has warned that the outlook for demand this winter is uncertain, given the growing economic headwinds, the escalating Ukraine war, and risks of a new wave of Covid-19.

Britain’s largest airport also predicted Christmas would be busy, and reported that it handled 5.8 million passengers during September, 15% below levels seen in 2019.

Although travel demand recovered from the pandemic, Heathrow was forced to cap flight numbers due to labour shortages, after passengers suffered delays, cancelled flights and lost luggage.

Here’s the full story:

The market was always going to retest the Bank’s resolve and put the Budget to the sword, points out Neil Wilson of Markets.com.

He says the situation “all seems rather messy and panicky”, and predicts the Bank may need to extend its intervention in the bond markets for longer (rather than ending on Friday).

To expand your emergency intervention in the market once is unfortunate, to do so twice looks like carelessness. Friday probably won’t be the last day of the Bank’s intervention in the gilt market – you’d think it will need to continue right up until either something really breaks and it gives up, or the Chancellor reveals his cunning plan to restore order…

Time-limited central bank backstops are not prone to succeeding in the long run. Usually, the market waits for the intervention to end before retesting the limits. Markets are like toddlers – always testing the boundaries, wildly overreacting and usually working to cause maximum mayhem at the most inconvenient times. Gilts trade a tad firmer after a steep selloff yesterday, but you wonder how long it holds.

Meanwhile, the Chancellor – not as cunning as a fox who’s just been appointed professor of cunning at Oxford University - is bringing forward OBR forecasts and details of his debt-cutting plan to October 31st...cue plenty of Halloween horror show puns for headline writers and commentators alike. The truth is markets have already been spooked – the task in three weeks is to restore calm.

Pat McFadden MP, Labour’s Shadow Chief Secretary to the Treasury, is urging the government to reverse last month’s mini-budget after the Bank of England stepped in again to calm markets.

McFadden says:

“That the Bank of England has been forced to step in for a second day running to reassure markets shows the government’s approach is not working, and creates renewed pressure for the Chancellor to reverse his Budget.

“This is a Tory crisis made in Downing Street, being paid for by working people.

“They have lost all credibility and control and they must respect our nation’s independent institutions, go back to the drawing board and reverse this damaging Budget.”

Shares in British pension providers have dropped in early trading.

Aviva (-2.9%), Legal and General (-2.5%) and Prudential (-1.6%) are all among the FTSE 100 fallers, after the Bank of England warned that dysfunction in the UK government debt market posed a “material risk to UK financial stability”.

Bond yields dip after BoE move

UK government bond prices have strengthened a little in early trading, but remain at worrying levels.

The yield, or interest rate, on 10-year UK bonds has dropped to around 4.6%, from 4.7% last night (reminder, the yield on a bond goes down when the price goes up).

This yield surged over 5% in the days after the mini-budget, forcing the Bank of England launched its £65bn bond-purchase programme.

The yield on 30-year UK gilts
The yield on 30-year UK gilts Photograph: Refinitiv

The yield on UK 10-year bonds has dropped too, to 4.37% from 4.49% last night.

Index-linked gilts yields are lower too, although this only makes a small impact in Monday’s selloff.

Updated

Economist: markets unsettled in wake of Trussonomics

The Bank of England has acted again to protect the UK’s government bond market because the markets are spooked by ‘Trussonomics’, explains Holger Schmieding, chief economist at Berenberg.

Schmieding says (via Retuters):

“The Bank of England has demonstrated with its recent temporary pivot that they are highly aware of market volatility and they are able to dampen it. So, I expect the interventions to work.

“But the need for them to intervene is a sign of how unsettled UK markets are in the wake of Trussonomics.

Schmieding added that the decision to start buying inflation-linked bonds is “a bit of a surprise”

“But they might intervene in various parts of the markets that are unsettled and that is partly a reflection of how the rate the exposure of major players.”

Snap reaction to Bank widening bond-buying programme

While the Bank is making a new attempt to calm the markets, its bond-buying programme is still due to end on Friday, points out Torsten Bell of Resolution Foundation:

Ed Conway of Sky News points out that the market reaction will be important – will this calm the selloff?

Former Financial Times editor Lionel Barber tweets that it’s ‘hard to understate’ the damage caused by Kwasi Kwarteng’s mini-budget:

Reuters’ Andy Bruce points out that the UK will auction £900m of long-dated index-linked gilts today – the pricing, and demand, for that sale will be interesting too….

Updated

Why BoE has started buying inflation-linked bonds

This chart shows how the yield (interest rate) on long-term inflation-linked UK bonds has surged in recent months.

Yields rise when prices fall. These index-linked bonds are heavily bought by pension funds, to protect themselves against rising inflation.

So the drop in prices has hit pension funds hard.

Sir John Gieve: Monday's market moves must have alarmed the Bank

The Bank of England must have been alarmed by the selloff in the UK bond market yesterday, explains Sir John Gieve, a former deputy governor of the Bank.

The tumble in prices yesterday prompted it to widen its operations to support financial stability today.

Gieve tells Radio 4’s Today Programme:

I think the moves yesterday must have alarmed them.

The message may have been, the market felt that there were still important investors who were exposed to a spiral developing, of having to sell gilts in order to find cash to meet demands in the markets.

That’s why they intervened the first time, and they must have decided they needed a bit longer to see those investors safe.

So by starting to buy index-linked bonds too, the BoE hopes to prevent investors being forced to sell into a falling market.

Gieve suggests that the bond-purchase programme could potentially be extended by a few more days, or even a couple more weeks, until Kwasi Kwarteng presents his medium-term fiscal plan on 31 October.

But even if that happened, the operation is still time-limited.

Bank of England expands bond market support again as market fears rise

Newsflash: The Bank of England is expanding its emergency bond buying operation for the second time this week, in a fresh attempt to calm the markets and protect pension funds.

The central bank is widening the scope of its daily programme in which it buys up UK government debt, to include purchases of index-linked government bonds (which are linked to inflation).

Announcing the move, the Bank says there has been a “further significant repricing of UK government debt, particularly index-linked gilts”, which could threaten the UK’s financial stability.

It warns:

Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.

That ‘fire sale’ dynamic is driven by pension funds using the Liability Driven Investment strategy. As government bond prices fall, LDI funds are forced to sell assets to cover losses, driving prices lower.

The move will act as a “further backstop to restore orderly market conditions”, the Bank says, by mopping up excess sales of index-linked gilts which the markets can’t cope with.

This £65bn bond-buying programme is still due to end on Friday. Yesterday, the Bank doubled the size of its daily bond purchases, to a maximum of £10bn from £5bn.

But despite that move, UK borrowing costs hit the highest level since the turmoil immediately after the mini-budget.

This pushed the yield (or interest rates) on 30-year UK bonds up to 4.6% on Monday (from below 3% at the start of September).

Updated

Introduction: IFS warns of £60bn black hole after mini-budget

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The perilous state of the UK’s public finances has been laid bare this morning, with an authorititive warning that Kwasi Kwarteng must find £62bn of spending cuts or tax rises to balance the books.

The Institute for Fiscal Studies says that the panicked reaction on international money markets to the chancellor’s “mini-budget” will drive up the size of the black hole in the UK finances, by increasing the the cost of extra borrowing.

My colleague Phillip Inman explains:

The £45bn cost of the mini-budget will wipe out any financial space left to the chancellor by his predecessor, swelling Britain’s debt as as share of national income for at least the next five years.

The IFS director, Paul Johnson, said that while it was “technically possible” for Kwarteng to balance the books via spending cuts, he warned public sector spending had already suffered a huge hit over the last decade and that there was “not much fat left to cut”.

The scale of the tax cuts in the mini-budget (to the basic rate of income tax, corporation tax and stamp duty) had prompted a seismic shock to the outlook for the public finances that left them deeper in the red, the IFS explained.

“This is because the permanent tax cuts were bigger than had been expected,” and because the expectations for Bank of England interest rates have rocketed to almost 6%, pushing mortgage rates towards 8%.

The government’s growth plans will only have a limited impact, the IFS says, meaning that hefty cuts to public services and tight control of welfare benefits, on a scale similar to the austerity a decade ago, would be needed to pay for those tax cuts.

Here’s the full story:

The International Monetary Fund will give its assessment on the global economy later today, as fears of a damaging downturn rise.

Last night, JPMorgan Chase chief executive Jamie Dimon predicted the American economy will tip into a recession next year, which could drive stocks lower create “panic” in the credit markets.

The agenda

  • 7am BST: UK unemployment report

  • 8am BST: Kantar’s latest supermaket grocery market share report

  • 10am BST: Institute for Fiscal Studies presents its Green Budget 2022

  • 2pm BST: International Monetary Fund releases its World Economic Outlook

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