Pound rebounds and government borrowing costs fall as Hunt fiscal statement looms
The pound and UK government bond yields have recovered in anticipation of a key statement from the new chancellor tasked with sorting out the fallout from the government’s disastrous mini-budget.
Sterling had fallen to a record low against the dollar at the end of September, after the short-lived then chancellor Kwasi Kwarteng unveiled the biggest programme of tax cuts for 50 years.
Mr Kwarteng, who was sacked on Friday after just 38 days in the job, paid the price for a giveaway that called into question the government’s economic credibility on financial markets.
The mini-budget led not just to a collapse in the value of the pound, but also prompted a surge in borrowing costs – forcing an unprecedented intervention by the Bank of England (BoE).
However, following the prime minister’s announcement on Friday that Mr Kwarteng had been sacked and that corporation tax would rise to 25% from April next year instead of being kept at 19%, there was a partial recovery for the UK currency and bond yields.
Mr Kwarteng’s replacement, former foreign and health secretary Jeremy Hunt, has since promised to win back the confidence of the financial markets by fully accounting for the government’s tax and spending plans.
Sterling gained 1.1% to hit $1.1294 on Monday at one stage and also made strides versus the euro when the Treasury revealed that Mr Hunt would deliver key parts of a medium-term plan later on Monday in support of “fiscal sustainability”.
The statement – released before UK financial markets opened – added that Mr Hunt met the BoE governor Andrew Bailey and the head of the Debt Management Office on Sunday night to brief them on the plans.
There would be a select few announcements brought forward from the medium-term fiscal plan that is due to be revealed on 31 October.
The bond markets also suggested an easing of the recent pressure, given additional concerns in some quarters after the BoE on Friday concluded its emergency gilt market support on Friday.
The Bank issued its own statement ahead of the open to say that its operations, aimed at helping pension funds battling higher collateral demands, had enabled a “significant increase in the resilience of the sector”.
It reiterated that other liquidity options remained available, if needed, to ensure smooth financing.
Any rises in government borrowing costs, through a gilt yield rise, would have reflected additional jitters.
‘Unruly pupils are still scheming to oust the beleaguered head’
But there was a downwards shift, with both the UK 20 and 30 year yields falling by more than 30 basis points in early trading.
CHANCELLOR SECURES SOME BREATHING SPACE
When markets closed on Friday, after a dramatic day that saw a chancellor sacked and a totemic economic policy junked, the verdict was troubling:
A sell off UK gilts had gathered pace before, during and after the Prime Minister’s press conference, and the closing bell could not come fast enough.
After Jeremy Hunt spent the weekend signalling a dramatic change in course to reassure the investors on whom confidence in the UK economy rests, the Treasury was plainly not going to take any chances on Monday morning.
That explains the pre-dawn announcement that the new chancellor would be bringing forward U-turns on Kwasi Kwarteng’s calamitous mini-budget.
The aim was to secure breathing space, a stay of execution from markets that could, had they continued to sense vulnerability, deepened the crisis and ended the fiscal repositioning before it began.
The need was all the more acute as this was the first Monday in a fortnight when the Bank of England was not acting as backstop to the gilt markets, its emergency intervention having been withdrawn on Friday, in part triggering the political meltdown that ended the week.
The response was precisely the one the Treasury and Downing Street wanted to see; the first move of UK gilt yields, a measure of the effective cost of Government borrowing, was down.
Yields on 10, 20 and 30-year bonds all moved down as trading began in London at 8am, a trend that if it lasts between now and 31st October, when the Office for Budget Responsibility delivers its calculation of the state of the public finances, has immense political and practical implications.
The gilt markets matter not just because they are an expression of confidence in a nation’s creditworthiness. Government bonds are the mechanism through which states borrow, and the less faith there is in your plan, the more it costs.
And those borrowing costs are central to the calculations the Treasury and the OBR are making. The UK has £2.4trn of debt and under the Truss plans was going to take on tens of billions more to fund tax cuts.
With market confidence evaporating (and gilt yields rising) the cost of that borrowing, old and new, rose. If yields can be brought down the cost of borrowing will fall, cutting billions from one side of the government’s balance sheet, which could in return reduce the need for cuts.
The next hours and days will be pivotal.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said other risk factors remained at play despite the initial recovery.
”New chancellor Jeremy Hunt has the air of a troubleshooting teacher brought in to turn around a failing school and faces his first big presentation test today with an emergency budget plan wheeled out to try and calm financial markets.
“This is all part of his charm offensive to instil confidence in the government’s ability to be fiscally responsible, but behind him unruly pupils are still scheming to oust the beleaguered head,” she wrote.
Can Truss remain PM?
It reflects a renewed focus on whether Ms Truss, the architect of the government’s initial economic strategy, can remain in the job.
A Tory MP told Sky News: “The idea that the prime minister can just scapegoat her chancellor and move on is deluded.
“This is her vision. She signed off on every detail and she defended it.”
The Conservative Party is now on its fifth chancellor in the past three years – Mr Hunt, Mr Kwarteng, Nadhim Zahawi, Rishi Sunak and Sajid Javid.
A UK-based car distributor has seen its shares hit a four-year low after reporting a fall in sales and warning of hits ahead from Donald Trump’s trade war.
Inchcape, which exports cars for manufacturers across more than 40 countries globally, saw its stock lose up to 16.9% in early trading on Wednesday after its first quarter trading update.
It told investors that while it was not currently experiencing damage from the Trump administration’s 25% tariffs on all US car imports, revenue fell by 5% over the three months to March to £2.1bn.
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Inchcape reported a resilient performance from its Americas division but struggles in its Asia-Pacific and European markets.
The period was dominated by trade war fears generally as the US president’s second term got under way and was marked by a surge in demand for goods in the US in a bid to beat any tariffs he threatened to impose.
Inchcape blamed the revenue decline on a strong comparable period in 2024 and “mixed market momentum”, led by that dash for shipments to the US to beat the imposition of any additional US duties.
They were universally imposed earlier this month, but Mr Trump has since signalled that some exemptions may soon be applied.
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Jobs fears as Jaguar halts shipments
There are fears that a prolonged period of trade disruption could result in job losses within the UK car industry and its supply chain.
Inchcape reaffirmed its 2025 guidance but said that excluded any impacts from tariffs.
Its actions to mitigate the effects included a focus on costs and inventory.
Read more:
UK to be among those worst hit by trade war, IMF warns
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Chief executive Duncan Tait said: “Demand is not currently being impacted by the tariff situation, although we do expect to see potential impacts on supply from our OEMs (original equipment manufacturers), the competitive environment, and market demand.
“We are taking proactive steps to support our key stakeholders, including taking a conservative approach to managing inventory levels, ensuring we remain disciplined on costs, focusing on cash generation and maintaining our strong balance sheet.”
Shares had recovered some poise by mid-morning, trading down by just over 7% following the initial slump.
Britain will not lower its standards or water down regulation in exchange for a trade deal with the US, the chancellor has confirmed.
Rachel Reeves was speaking ahead of a pivotal meeting with her American counterpart in Washington DC.
In an interview with Sky News, Ms Reeves said she was “confident” that a deal would be reached but said she had red lines on food and car standards, adding that changes to online safety were “non-negotiable for the British government”.
The comments mark the firmest commitment to a slew of rules and regulations that have long been a gripe for the Americans.
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The US administration is pushing for the UK to relax rules on agricultural exports, including hormone-treated beef.
While Britain could lower tariffs on some agricultural products that meet regulations, ministers have been clear that it will not lower its standards.
However, the government has been less firm with its stance on online safety.
A tech red line
The US tech industry has fiercely opposed Britain’s Online Safety Act, which was introduced in 2023 and requires tech companies to shield children from harmful content online.
In an earlier draft UK-US trade deal, the British government was considering a review of the bill in the hope of swerving US tariffs.
However, the chancellor suggested that this was no longer on the table.
“On food standards, we’ve always been really clear that we’re not going to be watering down standards in the UK and similarly, we’ve just passed the Online Safety Act and the safety, particularly of our children, is non-negotiable for the British government,” she said.
She added that Britain was “not going to water down areas of road safety”, a move that could pave the way for American SUVs that have been engineered to protect passengers but not pedestrians.
While non-tariff barriers will remain intact, it was reported on Tuesday night that the UK could lower its automotive tariff from 10% to 2.5%.
The calculations behind Reeves’s red lines
What can Britain offer the Americans if it’s not prepared to lower its standards?
Donald Trump has previously described non-tariff barriers that block US exporters as “cheating”.
Britain does have some scope to bring down tariff rates – and Rachel Reeves suggested that this was her focus – but ours is already a highly open economy, we don’t have huge scope to cut tariff rates.
The real prize for the Americans is in the realm of these non-tariff barriers.
There has been much speculation about what the UK could offer up, but the chancellor on Wednesday gave a comprehensive commitment that she would not dilute standards.
There are many who will breathe a collective sigh of relief – from UK farmers to road safety campaigners and parents of young children.
While the government is sensitive to any potential public backlash, it also has another factor to think about.
When Ms Reeves arrives back home, she will begin preparations for a UK-EU summit in London next month.
The UK’s food and road safety standards are, in many areas, in sync with Europe, and Britain is seeking even deeper integration.
Lowering standards for the Americans would make that deeper alignment with the Europeans impossible.
The chancellor has to decide which market is more valuable to Britain.
The answer is Europe.
Back at home, the chancellor suggested that she was still open to relaxing rules on the City of London, even though global financial markets have endured a period of turmoil, triggered by President Trump’s trade war.
Reforms at home?
In her Mansion House speech last November, the chancellor said post-2008 reforms had “gone too far” and set the course for deregulating the City.
Asked if that was a wise move in light of the recent sharp swings in the financial markets, Ms Reeves said: “I want regulators to regulate not just for risk but also for growth.
“We are making reforms and we have set out new remit letters to our financial services regulators.”
Britain’s borrowing costs hit their highest level in almost 30 years after Mr Trump’s Liberation Day tariffs announcements, a stark reminder that policy decisions in the US have the power to raise UK bond yields and in turn, affect the chancellor’s budget, dent her already small fiscal headroom and derail her plans for tax and spend.
However, the chancellor said she would not consider adapting her fiscal rules, which include a promise to cover day-to-day spending with tax receipts, even if it gives her more room to manoeuvre in the face of volatility.
“Fiscal rules are non-negotiable for a simple reason, that Britain must offer under this government fiscal and financial stability, which is so important in a world of global uncertainty,” she said.
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