Pound and gilts rally as Kwarteng U-turns on top tax rate

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Money market curbs hopes of next hike in interest rate from Bank of England

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The crisis in financial markets eased today as sterling and gilt thumbed Quasi Quarteng’s embarrassing U-turn on the 45p top tax rate.

By mid-afternoon the pound was up two-thirds against the dollar at $1.1236, although it was up about a percentage point in the day before the chancellor’s climb.

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Gilts traders were more relaxed about the borrowing outlook after the £2bn giveaway for the highest earners – one of the major triggers of last week’s extraordinary market turmoil – was reported to be “distraction”. He was unintentionally shot with an axe.

Yields on the benchmark 10-year gilt fell 19 basis points in one leg to fall below 4% for the first time since September 23. By mid-afternoon the yield was 3.894%.

Last week, the 10-year gilt yield rose to 4.5% from 3.5% before the chancellor’s disastrous mini-budget. Yields on other bonds on the curve also fell significantly.

The money market also reined in its hopes for a hike in interest rates, now rising by only 1.25% compared to 2% last week at the next meeting of the Bank of England’s Monetary Policy Committee (MPC) early next month.

Last week the bond market was suggesting the bank rate would be at least 6% next year. This price now looks like 5.5%, still a huge increase over the current 2.25%.

Many thousands of people have fixed rate mortgage deals coming up later this year and next year.

Guy Foster, chief strategist at RBC Brevin Dolphins, said: “The derivatives market is now showing signs of a lower rate hike since this U-turn on the additional tax rate. The move is more symbolic than fundamental, with a tax cut of around £2. billion is about £40 billion a year, which is an increase in the need for funds announced in the mini-budget.”

CBI Director General Tony Danker welcomed the U-turn. He told Radio 4: “Businesses up and down the country want the market to be stable. This is an absolute precondition for investment and growth, and it is a precondition for achieving these very good reforms.”

William Marsters, senior sales trader at Saxo UK, said: “The move to reverse the tax cut decision will not add much to the government’s balance sheet and will therefore be seen as more of a signal to investors than anything else.

“As far as the credibility of the government goes, investor concerns may be centered more around the government’s disconnect internally with the prime minister truce, adding that the decision to cut the top-tier tax was taken by Chancellor Quarteng. and other cabinet members were not consulted on the matter.”

Late last week Standard & Poor’s downgraded the outlook for the UK gilt from “stable” to “negative”, fearing a tax cut package would only increase debt and deficit.

Those fears persist, even though markets were calm today.

Joshua Raymond, director of financial brokerage XTB, said: “Until investors have clarity on the scale and cost of borrowing, which means detailed OBR forecasts, pound sterling volatility will continue.”

Credit: www.standard.co.uk /

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