Britain's finance minister unveils "mini budget"


© Reuters. Britain’s Chancellor of the Exchequer Kwasi Kwarteng walks outside Downing Street in London, Britain, September 23, 2022. REUTERS/Clodagh Kilcoyne

LONDON (Reuters) – British finance minister Kwasi Kwarteng on Friday unveiled a broad set of measures aimed at cutting taxes and energy bills for households and businesses to try to drive economic growth that would require a huge increase in borrowing.

UK gilt yields surged by the most in a day in well over a decade as the UK Debt Management Office laid out plans for additional issuance to fund the planned spending, while the pound hit new 37-year lows against the dollar.

Britain’s blue-chip stocks slid even further into the red, in line with a broader decline across the equities market.

MARKET REACTION:

STOCKS: The was last down 1.6% on the day, having traded around two-and-a-half month lows, but not all sectors were mired in the red. British homebuilders and household goods makers hit session highs, buoyed by the prospect of consumers getting tax breaks.

BONDS: Two-year gilt yields rose nearly 50 basis points to 3.997%, set for their biggest one-day rout since late 2009.

FOREX: extended losses, falling 1.3% on the day to around $1.10745, marking a new 37-year low.

COMMENTS:

DAVID PAGE, HEAD (LON:) OF MACRO RESEARCH, AXA INVESTMENT MANAGEMENT, LONDON:

“The market reaction is of course the most interesting. This is clearly something that suggests a significant amount of extra gilt borrowing, but at the same times it’s fiscal stimulus at a time when the Bank of England is already worried about aggregate demand being too high, and it’s highly likely to force the Bank of England to raise rates even more than we thought they were going to otherwise.

“In terms of sterling, the reaction is more interesting. If you get more fiscal stimulus and less monetary stimulus, that’s something that’s buoyant for the currency. But one also has to look at the current account deficit, which is now not going to narrow quite as much. So there is a question mark over the UK’s external position which questions the longer-term position of sterling.”

MUBIN HAQ, CHIEF EXECUTIVE, ABRDN FINANCIAL FAIRNESS TRUST:

“Today’s mini-budget delivered mini gains for those living on the margins, but maximum rewards for those with the highest incomes and significant assets. Our research shows 4.4 million households are already in serious financial difficulties and few see their prospects for being able to pay their bills improving.

“Help should have been laser focussed on those hardest-hit by the cost of living crisis as the economy enters into recession.”

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST, IG GROUP, LONDON:

“The Chancellor (and the new PM) appear to be betting the house on an economic rebound following on from his tax cuts and changes to planning. But while shareholders in housebuilders might be cheering, the new government has driven a coach and horses through the next few years of planning assumptions.

And the move to remove the top rate of tax gives Labour an easy shot at the next election, especially when the bonus cap removal is taken into account too. Gilt yields are up even in the minutes after the statement, showing that the government will have to pay more for its borrowing, a clear sign of market unease.”

MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:

“It really is that kind of rabbit out of the hat at the end, that not only is the additional rate going to be completely abolished, but also the cuts to the basic rate of income tax are going to be brought forward a year (which moved sterling). That is pretty significant.”

“The move in the pound is a function of two things. One is the diminishing downside effects on the growth outlook. People are going to have more money to spend.”

“Then there’s the fact that gilt yields are up 20 or so basis points after the announcement. That is because borrowing is going to have to increase, but it’s narrowing the gap between places like the U.S.”

“However, I don’t see this as any sort of longer-term signal to go long sterling.”

TREVOR GREETHAM, HEAD OF MULTI-ASSET, ROYAL LONDON, LONDON:

“Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary global financial crisis, when borrowing costs were low and private sector balance sheets were deleveraging. 

“Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”