Pound rallies on 45p tax rate U-turn; recession fears mount – business live

Gilts, the debt issued by the UK government, are rallying this morning after the humiliating decision to abandon scrapping the 45p tax rate.

Kwasi Kwarteng’s u-turn on the top rate of tax seems to be calming the gilt market, after prices tumbled in the panicky selloff following the mini-budget.

This has pushed down the cost of short and medium-term government borrowing (known as the yield on the bonds, which fall when prices rise).

The benchmark 10-year UK gilt yield has dropped by 10 basis points, to 4%, from 4.1% on Friday night.

Last week it spiked as high as 4.5%, having been just 3.5% before Kwarteng announced his unfunded tax cuts and spending pledges.

Shorter-dated two-year gilt yields are down 9 basis points to 4.2%.

Long-dated 30-year gilts (which are now being bought up by the Bank of England to calm the markets) have only strengthened slightly. Their yield has dipped a little to 3.76%, having hit 5% before the Bank intervened.

Significantly, other government bond prices are not moving as much. German 10-year bunds are flat, while US 10-year Treasury yields are only down 2 basis points.

This reaction, like the selloff last week, is being driven by the government’s actions, even though Kwarteng told the Today Programme this morning that rising interest rates are being driven by the US Federal Reserve (which is lifting interest rates to tackle inflation).

He made a similar point to LBC:

Victoria Scholar, head of investment at Interactive Investor, explains:

The Chancellor’s mini-budget sparked a major sell-off in the UK gilt market last week, prompting emergency intervention from the Bank of England. The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound.

Meanwhile it is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment.

Elsewhere in the markets, shares in investment bank Credit Suisse have dropped 10% in early trading to a new record low.

The fall comes despite the chief executive of Credit Suisse reassuring staff that the globally significant Swiss bank has a solid balance sheet, after credit markets rated its risk of default as the highest in a decade.

In a memo to staff on Friday, Ulrich Körner said there were “many factually inaccurate statements being made” in media coverage of the bank’s crisis, which has seen its share price plunge by 56% this year.

Körner said:

“I trust that you are not confusing our day-to-day stock price performance with the strong capital base and liquidity position of the bank,”

“We are in the process of reshaping Credit Suisse for a long-term, sustainable future – with significant potential for value creation.

“Given the deep franchise we have, with a longstanding focus on serving some of the world’s most successful entrepreneurs, I am confident we have what it takes to succeed.”

Liz Truss had hoped to carve out a reputation as the new Iron Lady. Now, though, she will be seen as “highly malleable”, says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

Streeter explains that investors will be encouraged that the ‘more reckless’ nature of Truss’s administration can be reined in, saying;

She has been manipulated into this U-turn after senior Conservatives yesterday came out in open revolt at the Treasury’s decision to scrap the 45p tax band for the wealthy while refusing to rule out cuts to welfare for the poorest.

Admitting to a communication mistake rather than a serious policy mishap didn’t cut it. Now this embarrassing climb down, taking unfunded tax cuts off the table, which Chancellor Kwasi Kwarteng has called a distraction, will help reassure the markets a little that the more reckless nature of this new administration can be reined in by the Conservative party.

A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government. But the credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably.

Streeter adds that Truss could yet decide to “change tack and Chancellor”, if the pound remains volatile in the weeks and months ahead.

The CBI, which represents British businesses, have welcomed the decision not to abolish the 45p tax rate.

Tony Danker, director-general of the CBI, has told Radio 4’s Today programme that scrapping the plan should help markets stabilise.

Danker says:

Businesses up and down the country want the markets to stabilise.

That is an absolute precondition to investment and growth, and it’s a precondition to getting onto these very good reforms.

So yes I think it’s a good development this morning.

If the markets stabilise, Danker hopes that the investment climate will also stabilise.

Danker also says he agrees with Kwasi Kwarteng that the 45p tax cut had become a distraction from the supply-side reforms in the government’s growth plan.

He says it is ‘absolutely essential’ that those reforms – which are “controversial enough” at the Conservative’s conference – were passed, as they will lift growth, he believes.

It’s official: the UK government will not go ahead with its controversial plan to scrap the 45p top rate of tax paid by h igh earners.

Chancellor Kwasi Kwarteng has announced the u-turn on Twitter, declaring:

“We are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.

Kwarteng says it has become clear that the plan has been ‘a distraction’ from the government’s mission to tackle the challenges facing the UK.

By abandoning it, he says the government can focus on delivering the major parts of its growth package.

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

The pound is rallying this morning, on reports that the UK government is preparing a screeching u-turn on its plan to abolish the 45p top rate of income tax.

Sterling has jumped by as much as a cent to over $1.126 – its highest level in over a week, just a week after it slumped to a record low around $1.035.

The recovery was sparked by reports chancellor Kwasi Kwarteng may reverse the proposed scrapping of the 45p rate of income tax, just 10 days after it was announced in the mini-budget.

The U-turn comes after strong opposition from several Tory MPs, after the mini-budget caused chaos in the financial markets last week amid concerns that Britain was increasing borrowing to fund tax cuts for the rich.

Last Friday, ratings agency Standard & Poor’s cut the outlook for its AA credit rating for British sovereign debt to “negative” from “stable”, judging that prime minister Liz Truss’s tax cut plans would cause debt to keep rising.

But it’s a remarkable twist; yesterday Truss said she was absolutely committed to abolishing the 45% top rate of tax.

Our Politics Live blogger Andrew Sparrow reports:

Only yesterday Liz Truss told the BBC’s Laura Kuenssberg that she was committed to sticking to the plan, announced in the min-budget, to abolish the 45% top rate of tax. Now the government is set to ditch it – after it became clear on the first day of the Conservative party conference that Truss would face a huge rebellion if she tried to force her MPs to vote for it.

The Sun’s political editor, Harry Cole, first broke the news of the U-turn last night. He is co-writting a biography of Truss, and is one of the journalists seen as being close to her administration.

Andy is covering all the action from the Conservative Party conference here:

Also coming up today….

European stock markets are set to start the new month with fresh losses, as recession fears mount.

Earlier today, data shows that Japan’s manufacturing activity grew at its slowest pace since the start of last year in September.

Japanese factories were hit by a slide in output and new orders, due to weakening demand from China, the United States and other trading partners.

Joe Hayes, senior economist at S&P Global Market Intelligence, which compiles the survey, explained:

“Weakness in Japan’s manufacturing sector persisted in September and even turned worse.

That’s a bad sign for demand in the global economy.

We’ll also find out how factories in the UK, eurozone and US fared last month, as worries about the global downturn deepen.

The agenda

• 9am BST: Eurozone manufacturing PMI report for September

• 9.30am BST: UK manufacturing PMI report for September

• 3pm BST: US manufacturing PMI report for September