Pound falls below $1.10 for the first time since 1985 after the mini budget | Sterling pound
Sterling fell below $1.10 for the first time since 1985 as investors feared the prospect of increased government borrowing to pay for blanket tax cuts at the Quasi Quarting.
By issuing a punitive ruling on the Chancellor’s ‘growth rush’, traders on Friday caused the pound to fall in a massive sell-off in response to the massive increase in public borrowing needed to fund his plans.
Analysts at US investment bank JPMorgan said the market reaction showed a “wider loss of investor confidence in the government’s approach”, reflecting the damage to Britain’s standing in global markets.
Analysts at Citi said the finance minister’s tax grant, the largest since 1972, “risks a crisis of confidence in sterling”.
The pound fell two and a half years against the dollar to a 37-year low of $1.0993, as concerns about the future path of public finances pushed up government borrowing costs. The drop below the token level of $1.10 came after the chancellor announced £45bn tax cuts targeting high-income earners.
The FTSE 100 fell more than 2% to trade below 7,000 for the first time since early March, after the Russian invasion of Ukraine, while the UK government’s cost of borrowing on international markets rose by the most in a single day in more than a decade.
Yields on UK two-year government bonds – which are inversely related to the value of bonds and rise as they fall – jumped as much as 0.4 percentage points to close to 4%, reaching the highest level since the 2008 financial crisis.
Borrowing costs on 10-year bonds rose more than 0.2 percentage points to trade near 3.8%, continuing the dramatic rise underway since Liz Truss became prime minister earlier this month. At the beginning of September, yields on UK sovereign debt were up by about one percentage point, significantly above those of similar advanced economies.
“[It’s] “It’s really hard to overstate the degree to which the Kwarteng Budget just destroyed the gilded market,” said Toby Nagle, a former fund manager at Columbia Threadneedle. Explaining the scale of the turmoil, he said five-year gold yields had moved the most in a single day since 1993 – outstripping the Covid pandemic, the 2008 financial crisis, and 9/11.
Investors have warned that Britain’s experience with Trussonomics comes at a difficult moment with the US dollar rising, interest rates from global central banks rising, borrowing costs rising across advanced economies amid weak economic growth and rising inflation.
However, they said Britain was set out after years of government damage to its reputation for sound economic management, as well as steps taken by the new prime minister.
Gabriel Foa, portfolio manager at Algebris Investments, said: “We are in a situation where the UK government has lost a lot of credibility in the past three or four years and has pushed the market’s patience in many ways.
“[It’s about] Managing Covid, Government Instability, Managing Brexit. It’s just a whole lot of worries. The United Kingdom was in the first league, [but] It goes from the first to the second to the third. If you give some indication that you are unreliable, you can move leagues.”
It comes after the Treasury said it would fund the Chancellor’s tax cuts and energy price guarantee for consumers and businesses with £72.4 billion in additional UK government debt sales than planned for the current financial year.
Instead of the £161.7 billion planned by the Office of Debt Management in April, the Treasury said it will now sell £234.1 billion of government bonds to international investors in 2022-23.
The change will mean investors are getting closer to buying government debt than previously expected, and this comes as the Bank of England prepares to sell £80 billion of gold bonds held on its balance sheet thanks to its quantitative easing programme.
Markets are betting that the Bank will be forced through Kwarteng’s support schemes to raise rates above 5% by May next year – more than double the current rate of 2.25% – on the expectation that it will add significantly to inflationary pressures.
Vivek Paul, Senior Portfolio Analyst at BlackRock, said: “UK credibility is what the markets react to.
In time we will know if there will be a fundamental change. the jury is out, [but] The initial reaction from the markets is not a resonant endorsement. Let’s put it this way.”
The moves come as the Bank responds to rising inflation by raising interest rates, despite the warning that the British economy is already in recession.
Antoine Buffett, chief interest rate analyst, and Chris Turner, head of global markets at Dutch bank ING, said conditions amount to a “perfect storm” for the UK as global markets avoid sterling and gold.
“Price action in UK bonds is going from bad to worse. A dreadful list of challenges has arisen for sterling-denominated bond investors, and the Treasury’s mini-budget has done little to bolster confidence.”