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

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Despite the recovery in gilt yields this morning, Britain’s borrowing costs are still much higher than even a month ago, as the BBC’s Andy Verity flags here:

Since 8am gilt yields have dropped – perhaps suggesting relief that the government is listening to its critics on the markets. Currently down 11 basis points (a basis point is 0.01%) for 5-year gilt yield at 4.29%.

— Andy Verity (@andyverity) October 3, 2022

However, before we celebrate cheaper mortgages, remember that that rate was less than 3% on September 5 when the new government took power. So interest on 5 year fixed rate home loans is set to cost over a third more than it would have a month ago.

— Andy Verity (@andyverity) October 3, 2022

UK government bonds strengthen after tax U-turn

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.

UK 10-year gilt yields
UK 10-year gilt yields Photograph: Refinitiv

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:

Mr Kwarteng tells @LBC that what happened in the gilt market “had nothing to do” with scrapping the tax rate.

He says that he accepts it was “controversial”.

In the “spirit of contrition and humility” he won’t go ahead with it, he adds.

— Theo Usherwood (@theousherwood) October 3, 2022

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.

Credit Suisse shares hit record low

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.”

The UK government still has ‘a lot to do’ to recover its credibility, warns Jane Foley, head of FX Strategy at Rabobank.

“Clearly sterling has performed better on the news, but there are still a lot of questions, ultimately the 45 pence tax rate was only a small part of the unfunded tax cuts announced.

The question remains is this enough? The answer will be clear in a few weeks’ time when the bank of emergency measures end.

“UK assets, the pound and gilts are not out of woods yet, and the British government has a lot to do to get back credibility.”

Haven’t looked at this for a while but the figures won’t have changed that much. The 45p tax rate isn’t a big deal in terms of government revenue. The basic rate has a much bigger impact. pic.twitter.com/1058S5Zxya

— Rick 🇺🇦 (@FlipChartRick) October 3, 2022

Analyst: Truss looks ‘highly malleable’, rather than new Iron Lady

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.

Anyway good luck to the Truss government on fracking, cutting employment rights, planning reform, and massive spending cuts.

— Sam Freedman (@Samfr) October 3, 2022

Pound jumps as UK PM Truss & chancellor Kwarteng have abandoned plan to abolish top rate of income tax for highest earners in astonishing U-turn. Kwarteng acknowledged that plan to axe 45% rate on earnings >£150,000 in a move to be paid for by borrowing had become “distraction.” pic.twitter.com/9hcxxL6FSz

— Holger Zschaepitz (@Schuldensuehner) October 3, 2022

Jan von Gerich, chief analyst at banking group Nordea, warns that the pound will probably remain under pressure.

He says that from a market perspective, scrapping plans to axe the 45p top rate of tax is “a good step in the right direction”.

It will take time for markets to buy the message but it should ease the pressure.”

“Questions still remain and sterling will likely remain under pressure.”

CBI: 45p tax rate U-turn is a good development.

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.

The pound has now recovered all its losses since Kwarteng’s mini-budget sent it slumping to record lows a week ago.

Kwarteng scraps abolition of 45p top tax rate

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.

Scrapping the abolition of the 45p top end tax rate is a ‘big deal’ for the pound, says Viraj Patel, macro strategist at Vanda Research.

He predicts the pound may push higher this week, as the damage caused by Kwasi Kwarteng’s mini-budget is unwound.

My estimates suggest $GBPUSD should be trading around 1.13-1.14 if the entire ‘Kami-Kwasi budget’ risk premium is unwound. Seems reasonable we get there in the next few sessions… 45p tax cut was the nail in the coffin for the pound last week. Taking this out is a big deal pic.twitter.com/LXwfCp3PWD

— Viraj Patel (@VPatelFX) October 3, 2022

Introduction: Sterling rallies on reports of 45p tax rate u-turn

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

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.

Major U-turn by Truss & Kwarteng – planned scrapping of 45p top rate of tax will NOT go ahead

Markets react very positively; pound 1.17% against dollar in half an hour after U-turn announced

— Jack Parker (@JackParkr) October 3, 2022

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.


NEW: Liz Truss preparing to ditch 45p rate TODAY after late crisis talks with Chancellor

Humiliating climb down plan comes after day of acrimony on Brum

Announcement expected in morn in body blow to new Government

No denial from No10 this eve https://t.co/He8qwMayou

— Harry Cole (@MrHarryCole) October 2, 2022

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

source: theguardian.com