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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Pound, shares and UK government bonds rally after most mini-budget tax cuts ditched – as it happened

Jeremy Hunt Liz Truss United States Kwasi Kwarteng Bank of England Steven Swinford Susannah Streeter Income Tax United Kingdom Office for Budget Responsibility

Closing post

Time to wrap up, after another dramatic day in the City as the UK’s financial – and political – crisis continues.

UK assets have rallied sharply tonight after the new chancellor, Jeremy Hunt, ripped up his predecessor’s mini-budget, further shredding prime minister Liz Truss’s dwindling authority.

The pound is heading towards its best day since March 2020 against the US dollar, having gained more than two-and-a-half cents to $1.143 tonight.

Bond price have surged, on relief that many of the unfunded tax cuts announced by Kwasi Kwarteng have been ditched, a move that will bring in £32bn.

Hunt surprised the markets by abandoning plans to cut the basic rate of income tax to 19%, as well as dropping a cut to the dividends tax, and reforms to the taxation of contractors, ditching the new VAT-free shopping scheme, and no longer freezing alcohol duty rates.

Hunt is also drastically scaling back the government’s flagship plan to cap rising energy prices – from two years of support to just six months.

UK borrowing costs have tumbled, with the yield (or interest rate) on 30-year UK gilts down a massive 40 basis points, to 4.37% from 4.77% on Friday.

The money markets have also dialled down their forecasts for interest rate increases. The Bank of England is now expected to raise interest rates to around 5.1% by next summer, down from over 6% a week ago.

The drop in borrowing costs, and hopes that interest rates will rise less sharply, should bring down the size of the UK’s fiscal black hole.

However, the Institute for Fiscal Studies warned that Hunt must go further to get debt falling – the chancellor will reveal his plans for spending cuts in two week’s time.

Our Politics Live blog has the latest details, as the chancellor updates MPs on his plans:

Here’s today’s main stories:

Britain’s new chancellor Jeremy Hunt is creating an Economic Advisory Council to provide him with “independent expert advice”.

Hunt has told MPs that the council’s members would be Rupert Harrison, who worked with former chancellor George Osborne (who imposed years of growth-sapping austerity a decade ago), along with former Bank of England policymakers Gertjan Vlieghe and Sushil Wadhwani, and Karen Ward, chief market strategist at JP Morgan.

This quartet will help Hunt steer the economy out of the crisis, and the slump in confidence in the UK among investors.

London stocks close higher

After a strong day’s trading, the UK’s domestically-focused FTSE 250 index has closed 2.75% higher tonight.

The blue-chip FTSE 100 index gained almost 1%, to finish at its highest closing level in a week.

Commercial property groups British Land (+5.1%) and Land Securities (+4.77%) were in the top risers, along with housebuilder Persimmon (+4.8%) and airline group IAG (+4.7%).

Updated

National Grid chief warns of blackout risks on ‘really, really cold’ evenings

In the energy sector….National Grid’s chief executive has warned British households to prepare for blackouts between 4pm and 7pm on “really, really cold” weekdays in January and February in the event of reduced gas imports from Europe.

The Financial Times has the details:

John Pettigrew said the company would have to impose rolling power cuts on “those deepest darkest evenings in January and February” if generators failed to secure enough gas from the continent to meet demand, particularly if the country suffers a cold snap.

Pettigrew’s comments at the Financial Times’s Energy Transition Summit came after National Grid, which oversees Britain’s electricity and gas systems, this month took the unusual step of setting out various “unlikely” scenarios in which Britain might not have sufficient energy supplies this winter.

National Grid’s “base case” is still that there will be sufficient gas and power to meet demand in Britain this winter, as it outlined last week.

But in a “worst case” circumstances, power would be cut off to parts of the country for up to three hours “probably between 4pm and 7pm in the evenings on those weekdays when it’s really, really cold in January and February”, Pettigrew said.

Here’s the full story.

Sterling near six-week high vs euro

The pound has climbed to its highest level against the euro in nearly six weeks.

Sterlin has gained almost one and a half eurocents to €1.163, the highest since 6 September.

Pound on track for best day since March 2020

Sterling is now on track for its best day against the US dollar since the turmoil early in the Covid-19 pandemic.

The pound has surged by over 2% against the greenback, or over two and a half cents, which would be the strongest daily gain since March 2020.

Sterling rallies over $1.14

The pound has now jumped over $1.14 for the first time since October 5th, almost two weeks ago.

Sterling has now gained two and a half cents. This strength, and an ongoing rally in bonds, shows that the new chancellor is reassuring markets.

Investec economists Philip Shaw and Sandra Horsfield explain:

By unwinding the majority of the ‘mini’-Budget, the new Chancellor has attempted to restore credibility to UK fiscal policy and his prompt intervention illustrates how seriously he is taking it. S&P recently placed the UK’s AA rating on a negative outlook, while Moody’s (Aa3) remarked that recent fiscal events were ‘credit negative’.

Mr Hunt may well have done enough to prevent a formal downgrade at the end of the week. Indeed gilts have extended this morning’s gains. Ten-year yields are now trading 40bps lower on the day at 3.92% and 30-year conventionals at 4.35%, 80bps down from their peak during the LDI pensions storm towards the end of September.

Updated

Sterling has now recovered all of Friday’s losses, as the currency continues to climb.

The pound is now up two cents against the US dollar at $1.1366 – only slightly below Thursday’s one-week high, and above its levels on mini-budget day.

UBS economist: Too early to say this saga is finished

Trussonomics is over… but we must wait two weeks to learn whether chancellor Jeremy Hunt has restored the UK’s fiscal credibility.

So writes economist Dean Turner of UBS Global Wealth Management, who explains there are two areas to consider regarding the economic impact of Hunt’s announcement today:

First, the energy price guarantee remaining in place through to April will support consumption and cap the rise of inflation through the winter months. Beyond this, as combination of less widespread support and no tax cuts point to a slower recovery from what we still expect to be a mild recession this winter.

Second, is the Bank of England who are likely to react to this news by proceeding more cautiously when it comes to tightening monetary policy. We still expect to see a larger than usual 75bps in November, but current market pricing for peak rates of over 5% still looks high.

Gilts yields have fallen, and the pound has recovered a little, but it is too early to say this saga is over. Investors will now look to the “fiscal event” planned for the end of the month when the Office for Budget Responsibility publish their assessment.

Only then will we get to see if government’s plans are truly credible.

Over in parliament, Jeremy Hunt has held a private meeting with Tory MPs following his ditching of most of the tax cuts in the mini-budget.

Our political correspondent Aubrey Allegretti has heard that the new chancellor emphasised the need to restore economic credibility:

Labour will shortly ask an urgent question about the sacking of Kwasi Kwarteng last Friday – Penny Mordaunt, the leader of the Commons, will respond:

Scrapping of mini-budget measures eases pressure for interest rate hikes

Economists are predicting that the Bank of England will not need to raise interest rates quite as high as previously feared.

The money markets currently see Bank Rate peaking over 5% next spring – but the EY ITEM Club think borrowing costs may actually settle at 4%.

They say:

With the fiscal stance now set to be tighter than previously planned – the tax U-turns alone equating to a tightening of around 1.3% of GDP – and the risk premia on UK assets falling, the Bank of England will be under less pressure to take an aggressive approach to raising interest rates.

Indeed, market expectations have already fallen back, with Bank Rate now predicted to peak at 5% next spring, down from 6% two weeks ago. This should translate into some reversal of the recent rise in mortgage rates and improve mortgage availability. The EY ITEM Club thinks investors’ expectations will continue to retreat, coming down closer to the EY ITEM Club’s forecast of a peak in Bank Rate of 4%.

Philip Shaw at Investec agrees that the BoE may take a less hawkish approach now:

“Our initial thought is that the growth outlook may be weaker but this could be tempered by the Bank rate potentially not needing to rise as far as our current forecast of 5% early next year.”

Stock markets are now rallying on both sides of the Atlantic.

In London, the FTSE 100 index has now jumped by 99 points, or 1.4%, to 6956, with housebuilders, commercial property firms, utility stocks and pension providers all sharply higher.

The smaller FTSE 250 index has surged by 2.7% – as Jeremy Hunt’s fiscal plans reassure the City.

A broader rally is underway too – with the pan-European Stoxx 600 jumping 2% to its highest since October 6th

And in New York, the Dow Jones Industrial Average has gained 2%, or 614 points, to 30,249 points.

Updated

Britains brewers, and pubs, are disappointed that Jeremy Hunt has abandoned the freeze on alcohol duty.

The British Beer & Pub Association say it would have saved the industry £300m, helping pubs get through the winter:

When Kwasi Kwarteng announced the freeze last month, the Treasury said the cut was worth £600m in total, and would saves consumer 7p on a pint of beer, 4p on a pint of cider, 38p on a bottle of wine, and £1.35 on a bottle of spirits.”

Roy Allkin, national chairman of the Society of Independent Brewers (SIBA), says small beer producers face even more uncertainty.

Small independent brewers will now have to wait a further few weeks to understand what this means for them, as the shakeup of the overarching alcohol duty system is still expected to go ahead.

Again this is creating more uncertainty for small brewers who are facing an extremely challenging trading environment dominated by energy spikes, price increases and a cost of living crisis.

IFS: It's a step in the right direction

Jeremy Hunt has not yet done enough to plug the gap in the government’s fiscal plans, warns Paul Johnson, head of the Institute for Fiscal Studies.

Last week, the IFS estimated that £60bn of savings were needed to get debt falling as a share of GDP, while there are reports that the Office for Budget Responsibility sees a £70bn black hole.

Johnson says:

Either way, today’s £32bn of tax rises would only take the Chancellor part way there. The fact that today’s announcements alone are unlikely to be enough is a measure of the scale of the problems we face.

But if the outlook for the cost of government borrowing improves, the fiscal gap will shrink – potentially by £7bn, Johnson explains:

Early indicators suggest that gilt rates may be reduced by perhaps as much as 0.5 percentage points. If this were to be sustained, and extend to a correspondingly lower path for Bank Rate, OBR ready reckoners suggest that debt interest spending would be reduced by around £7bn a year.

Having undone the big package of tax cuts Mr Hunt might now be able to delay big decisions on public spending – but still need to show a credible fiscal plan, Johnson concludes:

That is likely to involve at least some cuts to planned investment and day-to-day spending. There are no easy options here.

It is hard to see which of the big chunks of spending - health, pensions, welfare, education and defence - can be cut.

City experts: Liz Truss unlikely to remain PM for long

With the mini-budget consigned to history, economists and investors are concluding that Liz Truss’s term in office might soon be over too.

Charles Hepworth, investment director at GAM Investments says calm has returned to markets, thanks to Jeremy Hunt’s announcements….and expectations of a new PM soon as well.

All of this is due to the screeching handbrake turn in the Truss economic motorcade now that a new driver is at the wheel. Chancellor Hunt’s immediate efforts to get out on the front foot, bring forward his plans, and importantly, more openly, is a stark contrast with the previous Chancellor’s almost embarrassed, muffled, and tone-deaf performance.

“Almost all of PM Truss’s economic vision is gone and most of her leadership election promises. The income tax cut plan has been shelved indefinitely and the UK energy support scheme will apply now for just six months. Gone are virtually all the unfunded tax cut promises from the previous Chancellor and markets are of the view that soon so too will be the original architect of the failed mini-Budget.”

Paul Dales, chief UK economist at Capital Economics, says Hunt has essentially wiped out Truss and Kwarteng’s plans:

Altering Truss’s flagship policy in this way is the surest sign yet that Liz Truss won’t be Prime Minister for long. After all, pretty much everything she has done in the past 42 days has now been reversed by Hunt over a long weekend.

Uncertainty over Truss’s position as PM could mean more volatility for the pound, warns Fawad Razaqzada, market analyst at City Index and FOREX.com

Investors are wary of the political situation, which remains tense, and a lot could still change. For now, there is a bit of hope that Jeremy Hunt will help bring the country’s public finances back in order. But his work is undermining under-pressure PM Liz Truss, who some argue is on borrowed time.

As a result, traders remain very cautious, and thus unwilling to commit in one or other direction. This should mean continued volatility for sterling.

A chart showing how the pound has traded against the US dollar since August
A chart showing how the pound has traded against the US dollar since August Photograph: City Index

Key event

Sterling has rallied back over $1.13 against the US dollar, now up a cent and a half today.

That recovers Friday’s losses, when the pound weakened after Liz Truss’s short press conference following Kwasi Kwarteng’s sacking.

Britain’s short-term borrowing costs have dropped to their lowest since the mini-budget rocked the markets three weeks ago.

Two-year UK bonds have continued to rally as the bond traders welcome Jeremy Hunt’s move towards fiscal responsibility.

This has pushed the yield (interest rate) on two-year gilts as low as 3.525%, according to TradeWeb data, which is the lowest the mini-budget on 23rd September.

These short-term bond yields are used to price fixed-term mortgages, so today’s falls could help to calm that market.

Resolution Foundation: UK’s tax take to hit highest since 1950-51.

During the Conservative party leadership race, Liz Truss criticised Rishi Sunak for raising taxes to their highest level in 70 years.

But today’s junking of Truss’s mini-budget means that taxes are still heading towards the highest level since the early 1950s, seven decades ago.

Resolution Foundation has worked out that taxes, as a share of economic output, are on track to hit 36%:

Torsten Bell, chief executive of the Resolution Foundation, says the speed of the turnaround under Jeremy Hunt is ‘stark’:

This is now very clearly a tax raising parliament, with the tax take set to reach highs not sustained since 1950. The price of shielding the public finances from wholesale gas markets next year is more pressure on households, with the energy price cap now on course to hit £4,000 next April – almost double its effective level today.

“These are tough choices being made by the new Chancellor, that will reduce the scale of public spending cuts set to be announced on 31st October – even more so if they lead markets to reduce the interest rates they charge government for borrowing.

“But, with tens of billions of spending cuts still to come, and a new energy support package needing to be devised, many of Jeremy Hunt’s tough choices still lie ahead.”

The downside of making the public finances less exposed to soaring gas prices is that households will be more exposed.

Resolution Foundation’s Torsten Bell explains that ending the universal energy price cap ends next April (18 months earlier than Liz Truss planned) is basically a gamble that wholesale gas prices don’t surge again….

Scrapping energy price guarantee after six months 'will shock households'

Hunt’s decision to downgrade Liz Truss’s two-year energy price freeze to just six months will shock struggling families, say Laura Suter, head of personal finance at AJ Bell.

“Scrapping all but six months of the Energy Price Guarantee will send shockwaves through households in the UK, who are once again going to be exposed to soaring energy prices and the prospect of a struggle to pay their bills.

The indication from Mr Hunt is that help will be targeted at those who need it the most from April onwards, rather than universal support regardless of income.

However, there’s no guarantee that the support will be meaningful after April.”

Suter also explains that abandoning the cut in the basic rate of income tax will cost taxpayers up to £377 a year in additional tax compared to Liz Truss’ previous plans.

“That sound you can hear is the death knell for Trussonomics, with the vast majority of her tax cutting plans now consigned to the bin. People have had yogurt in their fridge that’s lasted longer than some of the Government’s planned tax cuts, and it’s clear that Liz Truss has opted to have one last attempt at saving her skin by ditching her economic principles rather than try to cling on to her policy plans.

“But many Tory party members who voted for her will wonder what the point of Truss is without Trussonomics, particularly as she now has the unwelcome moniker of the most unpopular Prime Minister in recent history.

There will now be big questions around the stability of Liz Truss’ position.

Hunt has brought 'some semblance of credibility' back

Chancellor Hunt’s sweeping dismissal of his predecessor’s mini-budget should allow the Bank of England to raise interest rates less aggressively, experts say.

But uncertainty over Liz Truss’s future, following the ditching of much of her economic plan, will continue to create volatility in the markets.

So warns Richard Carter, head of fixed interest research at Quilter Cheviot, who explains:

“Jeremy Hunt has achieved the first step in returning some semblance of credibility to the government’s economic reputation as the bond markets have welcomed his announcement.

It is quite remarkable that it took an almost complete scrapping of the mini-budget announced just over three weeks ago. However, that credibility is still incredibly fragile and much of the government’s next moves will depend on the OBR forecasts being produced at the end of this month.

They won’t make for pretty reading but following this announcement should give investors some confidence that the UK’s finances are on a more stable footing.

Business journalist Declan Curry points out that Jeremy Hunt hasn’t merely u-turned on the planned 1p cut to the basic rate of income tax – he’s ditched the reduction from 20p to 19p altogether.

Updated

The London stock market has rallied higher as City traders react to chancellor Hunt’s announcement.

The blue-chip FTSE 100 index now up 0.75% or 51 points at 6909, while the more domestically-focused FTSE 250 has jumped 1.3%.

Housebuilders shares have now jumped by around 4%, on relief that the cut in stamp duty is not being scrapped (this means no tax to be paid on properties up to the value of £250,000)

Jeremy Hunt is bringing back an orthodox approach to tax and spending, which should reassure financial markets, says Dermot O’Leary, chief economist at investment bank Goodbody.

“The Chancellor’s emergency statement should help restore some much-needed market confidence after an extraordinary fortnight of volatility. These measures were designed to get ahead of any further market turbulence today and reassert the Government’s credentials for economic competence and fiscal responsibility.

They will go some way towards reassuring the markets which already, it seems, have faith in Jeremy Hunt as a safe pair of hands at the Treasury. Already we saw the pound strengthen and stocks rise at the start of today as the markets anticipated further fiscal policy U-turns to make the Government’s sums add up.

“This announcement doesn’t resolve the problems facing the UK, not least the political fallout which will be significant for the Prime Minister and the Government.

However, what Jeremy Hunt has achieved, only a few days into the job, is reframing the economic debate around a more orthodox approach to tax and spend, which will in turn increase confidence that debt can be managed sustainably over coming years.

After the last few weeks of political upheaval and economic uncertainty, being back on firm footing grounded in economic fundamentals will be welcomed by investors.”

Those ditched tax cuts in full

Here’s the full details of the tax cuts which have been abandoned by chancellor Jeremy Hunt, as he tries to preserve economic stability and show the markets Britain is committed to fiscal discipline.

  • Cutting the basic rate of income tax to 19% from April 2023. While the government aims to proceed with the cut in due course, this will only take place when economic conditions allow for it and a change is affordable. The basic rate of income tax will therefore remain at 20% indefinitely. This is worth around £6 billion a year.

  • Cutting dividends tax by 1.25 percentage points from April 2023. The 1.25 percentage points increase, which took effect in April 2022, will now remain in place. This is valued at around £1 billion a year.

  • Repealing the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) from April 2023. The reforms will now remain in place. This will cut the cost of the government’s Growth Plan by around £2 billion a year.

  • Introducing a new VAT-free shopping scheme for non-UK visitors to Great Britain. Not proceeding with this scheme is worth around £2 billion a year.

  • Freezing alcohol duty rates from 1 February 2023 for a year. Not proceeding with the freeze is worth approximately £600 million a year. The next steps of the Alcohol Duty Review announced in Growth Plan 2022 will continue as planned. The alcohol duty uprating decision and interactions with the wider reforms to alcohol duties under the Alcohol Duty Review will be considered in due course.

This is on top of abandoning the abolition of the top rate of income tax, and proceeding with the increase in the corporation tax rate.

Updated

Ryan Shorthouse, chief executive of the centrist Conservative thinktank Bright Blue, says:

“Fiscal discipline is no longer secondary to going for growth. The Conservative Government is turning away from its brief flirtation with Keynesianism.

Balancing the books is back. Trussonomics suppressed. Cameronism returns.”

Markets remain upbeat as Hunt ditches mini-budget tax cuts

Investors are welcoming the chancellor’s decision to ditch most of the mini-budget, and rein in the costs of the energy price cap.

The pound is holding its earlier gains, still up around one cent at $1.127.

And UK bonds are on track for one of their best days in decades, as Jeremy Hunt scrapped most of the unfunded tax cuts that had undermined confidence in the UK.

The yields on the 30-year gilt has dropped by nearly 40 basis points to 4.385%, marking one of its biggest daily drops on record, Reuters reports.

Bond prices had already strengthened sharply before Hunt took to the air, particularly following reports that the energy cap was being cut back (see earlier post).

Hunt announces review of energy bill support

Another significant development – Jeremy Hunt has torn up the government’s two-year energy bill freeze, which will now run as planned for just six months.

The chancellor says that the biggest single expense in last month’s growth plan was the energy price guarantee.

And he’s launching a new review of how to support energy bills beyond next April.

[Liz Truss’s guarantee capped energy costs, so the average family would pay £2,500 per year, although there was no maximum on anyone’s bill).

Hunt says the ‘landmark policy’ will continue to provide support until April.

But he says the prime minister agrees that it’s not responsible to continue exposing public finances to unlimited volatility in gas prices.

Hunt wants a new approach that will cost the taxpayer significantly less than planned.

And he says “any support for businesses” will be targeted at those most affected by high energy costs. [the current package for non-domestic users runs out in April].

Updated

Key event

Hunt says his measures, along with the decision not to cut corporation tax and the reversal of the abolition of the 45p top rate of tax, will raise £32bn per year.

Plan to cut basic rate of income tax scrapped

Hunt has also dropped the plan to cut the basic rate of income tax from 20p to 19p.

The chancellor says it’s not right to borrow to fund this cut.

So basic rate will remain at 20p, and do so indefinitely until economic circumstances allow it to be reduced.

That’s a significant reversal – Kwasi Kwarteng has brought the move forward by a year, from April 2024 to April 2023.

Hunt: We're reversing almost all the tax measures announced in the growth plan

Chancellor Jeremy Hunt explains that he will reverse almost all the tax measures announced in the growth plan three weeks ago, that have not started parliamentary legislation.

That means the government will continue with the planned abolition of the health and social care levy (the 1.25 percentage point increase in national insurance) and the changes to stamp duty.

But the government will no longer proceed with cutting dividend tax rates,

or the reversal of off-payroll working reforms (the IR35 rules relating to contractors),

or the VAT-free shopping scheme for non-UK visitors;

or the freeze on alcohol duty rates.

Updated

Hunt: Governments must protect economic stability

Jeremy Hunt is giving his statement now, speaking at the Treasury.

Hunt begins by explaining that a central responsibility for any government is to do what’s necessary for economic stability.

It’s vital for businesses making investment decisions, and families worried about their jobs, mortgages and the cost to living. And while governments can’t control markets, they can give certainty about the sustainability of public finances.

So while the chancellor and the PM are both committed to cutting corporation tax, they agreed on Friday that they could not proceed with their plan to reverse the increase (from 19% to 25%).

And he confirms that the government has decided to make further changes to the mini-budget, and is announcing them now ahead of the medium-term fiscal plan due in two weeks.

Key event

Chancellor Jeremy Hunt is due to make his emergency statement shortly – our Politics Live blog will be tracking all the details:

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%).

Updated

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 sigh of relief in Downing Street when the bond markets opened would have been audible “halfway down Horse Guards Parade”, says AJ Bell investment director Russ Mould.

The drop in borrrowing costs shows investors are reacting positively to new Chancellor Jeremy Hunt’s rescue mission, Mould explains:

“Gilt yields have fallen sharply, the pound is higher and unless Hunt stuffs up his early trailer of new fiscal measures, it seems the government has bought itself some breathing room with the financial markets.

This is particularly reassuring given the Bank of England has, officially at least, concluded its intervention in the gilt market.

“Longer term there are big questions about the impact of what looks like being hefty real-terms cuts to public services. However, in the short-term, Hunt, like a professional problem solver brought in to steady an ailing business, seems to have done what was required.

Even if it meant tearing up much of the mini-Budget and starting again.

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:

Updated

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:

UK stock market higher

London’s stock market has opened higher, on optimism that Trussonomics is being ditched by the new chancellor.

The blue-chip FTSE 100 index, which hit a two-year low last week, has gained 0.6% this morning (up 44 points at 6,903 points).

Housebuilders such as Barratt Development and Taylor Wimpey are up over 2%, having been hit by the surge in borrowing costs following the mini-budget.

The domestically-focused FTSE 250 index of medium-sized firms has gained 0.9%.

UK long-dated government bonds have basically recovered their losses from Friday after Liz Truss’s brief press conference disappointed the City, points out Andy Bruce of Reuters.

Truss spent that eight-minute appearance trying to dodge responsibility and blame for the UK financial crisis, and only took four questions from reporters.

As As my colleague Andrew Sparrow explained at the time, it did little or nothing to persuade her MPs, or anyone else, that she will, or even should, survive as PM.

More early reaction to the drop in UK borrowing costs this morning:

Updated

Shorter-dated UK government bonds are also rallying in early trading.

With price rising, the interest rate on two-year UK bonds has dropped. They’re now trading at a yield of 3.68%, down from 3.9% on Friday night.

The yield, or interest rate, on 2-year UK bonds
The yield, or interest rate, on 2-year UK bonds Photograph: Refinitiv

The markets are reacting positively to Hunt’s expedited timeline, which alleviates some of the fiscal uncertainty haunting the UK.

Victoria Scholar, head of investment at interactive investor, explains:

It is the first day of trade for the UK gilt market after the end of the Bank of England’s emergency bond-buying intervention. Out of the gates, UK gilt yields are trading mostly lower as bond prices push higher, suggesting that the sacking of Kwasi Kwarteng and the appointment of Jeremy Hunt have helped to stabilise the market to some extent, reinstating some confidence in the UK government borrowing market.

She adds, though, that international investors remain cautious towards the UK:

Gilts and the pound are still grappling with below normal trader appetite amid the fiscal uncertainty.

Despite this early rally in the bond market, UK borrowing costs are still rather higher than a month ago, before the mini-budget.

This chart shows how 30-year government bonds were trading at a yield (interest rate) of below 3.5% in mid-September.

The yields, or interest rate, on 30-year UK bonds
The yields, or interest rate, on 30-year UK bonds Photograph: Refinitiv

They then surged to 5% after Kwasi Kwarteng’s announcement, forcing the Bank of England to temporarily intervene.

UK government borrowing costs fall as trading begins

The bond market is open…… and UK government borrowing costs are falling.

That suggests the City is welcoming Jeremy Hunt’s push to unravel the mini-budget with new tax and spending plans.

The yield, or interest rate, on 30-year government bonds (or gilts) has dropped sharply to 4.55%, down from 4.77% on Friday night.

Yields measure the cost of government borrowing, and fall when bond prices rise (and vice versa).

UK 10-year gilts are also rallying, pushing down the yield to 4.13% from 4.3% at the end of last week.

This should reassure the Treasury, as Sky News’s Paul Kelso explains:

Updated

The Bank of England adds that liquidity is still available to banks through its new “Temporary Expanded Collateral Repo Facility”.

TECRF was created last week to help banks ease liquidity pressures facing their client funds caught up in the recent market turmoil which threatened pension funds.

The Bank of England has released a statement, confirming that it ended its temporary and targeted purchases of long-dated UK government bonds on Friday afternoon.

The Bank says that the programme helped pension funds which had used liability-driven investment (LDI) strategies (who came under stress when UK bond prices tumbled last month).

The BoE says:

At the outset of the intervention, the Bank said that it would carry out temporary purchases on whatever scale was necessary to restore orderly market conditions. The purpose of the operations was to provide time for LDI funds to address risks to their resilience from volatility in the gilt market, not to provide a permanent backstop.

As previously announced, the Bank terminated these operations and ceased all bond purchases on Friday 14 October. As intended, these operations have enabled a significant increase in the resilience of the sector.

Labour: Ministers are terrified of the markets

Shadow treasury chief secretary Pat McFadden says Chancellor Jeremy Hunt’s decision to bring forward tax and spending measures is evidence of the panic in the government.

It also shows how much damage has been caused by the mini-budget,McFadden told BBC Breakfast.

Ministers are terrified about what happens when the markets open this morning.

That is testament to just how much chaos has been caused by Liz Truss since she became prime minister.

Updated

Jeremy Hunt is trying to prevent a rout in the bond market by rushing out new tax and spending measures today.

It’s an extraordinary situation, explains ITV’s Robert Peston:

UK to be in recession until summer 2023

Jeremy Hunt will announce tax and spending measures today under darkening economic stormclouds.

Economists at the EY ITEM Club have predicted that the UK economy will drop into recession, and remain there until next summer, after downgrading its economic forecasts.

Its Autumn Forecast warned that:

High energy prices, elevated inflation, rising interest rates and global economic weakness mean the UK economy is expected to be in recession until the middle of 2023.

EY ITEM Club predicts that UK economic output fell by 0.3% in the third quarter of this year, and will then contract by around 0.2% each quarter from October-December to April-June 2023.

GDP is now forecast to shrink by 0.3% in 2023 – a downgrade from the 1% growth forecast in the summer, while the growth forecast for 2022 has been upgraded to 4.3% from 3.7%.

Investment bank Goldman Sachs also predicted the UK will enter a deeper recession than previously expected.

The US investment bank downgraded its outlook for Britain, forecasting the UK economy would shrink by 1% next year, down from its previous estimate for a 0.4% contraction.

Goldman Sachs said that last week’s u-turn to increase corporation tax to 25% was a factor:

“Folding in weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April, we downgrade our UK growth outlook further and now expect a more significant recession.”

Mel Stride: Strong start by chancellor Hunt

Jeremy Hunt’s decision to announce some tax and spending measures today is a wise decision, says Mel Stride, the Conservative MP who chairs parliament’s Treasury Committee.

“Strong start by Jeremy Hunt as chancellor,”

“Gets what needs to be done and is acting fast. Surprising markets positively on the upside with an early statement to House of Commons today is a wise move.

Message is ‘we get what needs to be done and it’s being sorted’.”

Today’s early morning statement shows just how nervous the government, and the Bank of England, are about the UK bond market, points out Ed Conway of Sky News:

We’ll find out at 8am if the bond market is calmed….

The pound is being lifted by rising investor confidence that more of Prime Minister Liz Truss’s package of unfunded tax cuts may be reversed, reports Bloomberg:

“It does indicate that they are moving back to some degree of fiscal probity and employing a slightly more prudent fiscal outlook,” said Peter Kinsella, global head of FX strategy at Union Bancaire Privee UBP SA in London.

The government’s steps should be enough to “stabilize” the currency before the announcement of the medium-term fiscal plan at the end of the month, he added.

Analyst: Hunt sets scene for bonfire of tax cuts

Fears that the bond markets will take fright again has prompted Jeremy Hunt to take “fresh damage limitation measures”, comments Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

She expects a roll-back of planned tax cuts, as the chancellor tries to calm financial markets.

It looks highly likely that the 1p cut in the base rate of income tax set to be postponed, we could see changes to the new VAT-free shopping scheme for tourists, and possibly a reversal of plans to relax the way tax is collected from self-employed people. We could even see a rise in VAT.

But filling the black holes in the government’s finances will be far from easy so highly unpalatable spending cuts across government departments are also expected. Jeremy Hunt had already been setting the scene for this bonfire of tax cuts over the weekend.

Streeter adds that Hunt’s pledges of fiscal responsibility, and speculation that Liz Truss’ days are numbered, both lifted the pound back towards $1.13 this morning.

Since the emergency budget statement was announced, it’s gained further ground. But sterling is still weaker than before Kwasi Kwarteng was ruthlessly axed, with the chief architect of the disastrous mini-budget still, for now, in place.

Updated

Steven Swinford of The Times reports that Liz Truss and Jeremy Hunt have agreed to defer the 1p cut in the basic rate of income tax until 2024.

Former chancellor Kwasi Kwarteng had announced in the mini-budget that the basic rate of income tax would be cut from 20% to 19% from April 2023, a year early, to help with the cost of living crisis.

Treasury: Chancellor to bring forward measures to support fiscal sustainability.

Here’s the full statement from the Treasury:

The Chancellor will make a statement later today, bringing forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability.

He will also make a statement in the House of Commons this afternoon.

This follows the Prime Minister’s statement on Friday, and further conversations between the Prime Minister and the Chancellor over the weekend, to ensure sustainable public finances underpin economic growth.

The Chancellor will then deliver the full Medium-Term Fiscal Plan to be published alongside a forecast from the independent Office for Budget Responsibility on 31 October.

The Chancellor met with the Governor of the Bank of England and the Head of the Debt Management Office last night to brief them on these plans.

Pound higher in early trading

The pound has strengthened this morning, as investors react to the news that Jeremy Hunt is fast-tracking some tax and spending plans to today.

Sterling has gained over a cent to $1.128 against the US dollar, recovering much of Friday’s losses.

The pound vs the US dollar
The pound vs the US dollar Photograph: Refinitiv

The financial markets are mainly focused on the pound today, explains Naeem Aslam, chief market analyst at Avatrade:

Prime Minister Liz Truss has appointed a new Chancellor of the Exchequer in place, and one could say at this stage that the mini-budget has only done harm to the British economy and its currency, as most of the policies that were announced will be reversed.

It appears that the UK will have to adopt strict austerity measures now in order to bring its economy back on track. But the timing of introducing austerity is not the best as the government will have to use austerity when the public is already struggling with higher interest rates which are going to only increase in the coming months and quarters.

Increasing taxes, which is what the new Chancellor is hinting, will only increase the pressure on the British public as many are struggling to meet their daily needs already.

Introduction: Hunt brings forward fiscal announcements to calm markets

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

The financial markets will give their verdict on Liz Truss’s government today as the PM clings onto power in the face of growing pressure to quit.

And in an attempt to reassure investors about Britain’s financial stability, new chancellor Jeremy Hunt is to announce some tax and spending plans today – the latest in a series of u-turns from the government.

In a surprise move, the Treasury has announced that the Chancellor will make a statement later today, which will “bring forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability”.

Hunt will also give a statement to parliament on the plan.

By announcing these tax and spending measures a fortnight earlier than expected, Hunt is trying to reassure jittery markets and turn around a loss of confidence in the government’s fiscal plans.

Over the weekend, Hunt unceremoniously chucked Truss and Kwarteng’s disastrous mini-budget under the bus.

Instead of unfunded tax cuts to spur growth, Hunt warned that some taxes will rise and spending will be squeezed in an attempt to persuade international investors Britain is a reliable, responsible country.

Not the easiest task, given the hammering which recent events have dealt to confidence.

With the plan to cut corporation tax already scrapped, Hunt could delay plans to cut a penny off income tax by a year, or demand even more ‘efficiency savings’ from government departments, despite there being little to trim in, say, health or education.

The medium-term fiscal plan, to show how the UK plans to balance the books, is scheduled for 31 October, when we’ll also get the Office for Budget Responsibility’s forecasts.

While the chancellor tries to calm nerves, the government bond market no longer has the safety net provided by the Bank of England. Its emergency pledge to buy up long-dated gilts ended on Friday afternoon, as planned, after giving pension funds the opportunity to extricate themselves from the ‘doom loop’ of falling bond prices after the mini-budget.

UK gilts will resume trading at 8am this morning, when the London stock market also opens. If borrowing costs push higher, it could intensify calls for more change in Downing Street, or even spur the BoE into fresh action.

Analysts have warned that we could face another week of turbulent markets.

UK assets have been badly hit by the British government’s loss of credibility, as we saw on Friday afternoon.

Bond prices had been recovering on Friday morning, but lurched lower after Truss’s unimpressive press conference - announcing the exit of Kwasi Kwarteng - didn’t offer much reassurance of how the UK’s fiscal black hole - thought to exceed £70bn - will be filled.

And in Westminster, the beleaguered prime minister will attempt to shore up her crumbling support by gathering her cabinet ministers at No 10 tonight.

But some MPs went public yesterday calling Truss to quit, including backbencher Jamie Wallis -- who has confirmed to the Guardian that he had submitted a no confidence letter -- and veteran Tory MP Crispin Blunt.

The agenda

  • 8am BST: China publishes FDI (foreign direct investment) figures for September

  • 9am BST: Italian inflation rate for September

  • 11am BST: Jeremy Hunt expected to announce tax and spending plans

  • 11am BST: German Bundesbank’s monthly report

  • 1.30pm BST: Empire State manufacturing survey of New York factories

Updated

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