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.
The Chancellor borrowed more than expected at the start of the new tax year, piling more pressure on the public finances ahead of next month’s spending review.
Data from the Office for National Statistics (ONS) showed estimated net borrowing of £20.2bn in April – higher than the £17.9bn forecast by economists and the fourth highest April total on record.
That was despite a £1.7bn projected boost from employer national insurance contributions – hiked in October’s budget to help get the public finances in order and which kicked-in on 6 April.
The main reasons for the rise in borrowing included increases in public sector pay, along with higher benefits and state pensions, the ONS said.
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The data will do nothing to ease nerves over the state of the nation’s coffers amid renewed concerns Rachel Reeves may be forced to act again, in the autumn budget, to meet her own “non-negotiable” fiscal rules.
They say she must balance day-to-day spending with revenues by 2029-30, while improving public services and targeting accelerated economic growth.
The Chancellor was forced to restore a £10bn buffer at the spring statement in March, led by planned welfare curbs, after the economy flatlined.
A further restoration of headroom may be on the cards in October, given that stronger growth in the first quarter of the year is forecast to prove elusive across the rest of 2025.
The run-up to next month’s spending review – which sets budgets for government departments – has been dominated by a political row over one of her first actions in the role, which saw universal winter fuel payments stopped.
Prime Minister Sir Keir Starmer confirmed on Wednesday that a U-turn, of sorts, is on the cards.
The prospect of a higher bill ahead will do nothing to ease the cost of servicing government debt, with bond market investors continuing to demand a higher premium to hold UK gilts.
Their concerns include not only the forecasts for slowing growth but also persistent inflation.
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What the inflation increase means for you
One good bit of news for Ms Reeves was a downwards revision by the ONS to its government borrowing figure for the last financial year.
The total dropped by almost £4bn to £148.3bn.
The shift was explained by higher tax receipts but the sum still remained about £11bn above the updated forecast by the Office for Budget Responsibility.
Darren Jones, chief secretary to the Treasury, said of the ONS figures: “After years of economic instability crippling the public purse, we have taken the decisions to stabilise our public finances, which has helped deliver four interest rate cuts since August, cutting the cost of borrowing for businesses and working people.
“We’re fixing the NHS, with three million more appointments to bring waiting lists down, rebuilding Britain with our landmark planning reforms and strengthening our borders, delivering on the priorities of the country through our plan for change.”
Read more from Sky News:
Bitcoin hits new record high
Inflation at highest level since January 2024
There is a growing school of thought that Ms Reeves will need to raise taxes in October if she is to meet her commitments, including her fiscal rules.
Lindsay James, investor strategist at wealth management firm Quilter, said: “The decision to hold off on tax rises in the spring budget increasingly looks like a temporary reprieve.
“As borrowing continues to outstrip forecasts and debt interest costs remain elevated, pressure is building on the chancellor to make tougher choices.”
Bitcoin has surged to a new all-time high – breaking through $111,000 for the first time.
It means every single person who has bought it since 2009 (and held onto it) will be sitting on a profit.
The surge follows a pretty dramatic 2025 for Bitcoin (BTC), with Donald Trump’s presidency making this digital asset even more volatile than usual.
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BTC had first managed to hit $109,000 on 20 January – the day Mr Trump was inaugurated – with investors hopeful that he would introduce a slew of pro-crypto policies.
Despite the president coming good on some of those promises, the world’s biggest cryptocurrency soon fell, amid accusations these policies didn’t go far enough.
The White House has confirmed the US will treat Bitcoin seized from criminals as an investment, but there was disappointment when it was confirmed the government would not be buying additional coins for its “strategic reserve” using taxpayers’ money.
Bitcoin also took a battering in the immediate aftermath of Mr Trump’s controversial “Liberation Day” tariffs – slumping to lows of $75,000 in April as investors dumped riskier assets.
There are several factors behind this recent comeback, with laws designed to regulate the crypto sector now advancing through the US Senate for the first time.
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Feb: Hackers steal $1.5bn in cryptocurrency.
Interest in Bitcoin is also growing among hedge funds and financial institutions, while some companies are now in a race to buy as much of this cryptocurrency as possible.
One company called Strategy now has a war chest of 576,230 BTC worth $63bn – resulting in handsome profits of more than $23bn.
Part of BTC’s appeal lies in how it has a limited supply of 21 million coins, whereas the amount of traditional currencies in circulation often increases over time.
The latest milestone will likely contribute to a euphoric atmosphere when the president hosts a controversial dinner tomorrow for 220 of the biggest investors in $TRUMP, his very own cryptocurrency.
It also coincides with Bitcoin 2025 – the biggest crypto conference in the world – which is due to begin in Las Vegas on Tuesday – and growing financial market concerns about the size of the US government’s ballooning debt pile.
Nigel Green, chief executive of global financial advisory firm deVere Group, expects Bitcoin to set new milestones in the coming months.
“$150,000 no longer looks ambitious – it looks cautious,” he wrote in a note.
“Several forces have aligned to propel the market. A cooler-than-expected US inflation print, an easing in trade tensions between Washington and Beijing, and the Moody’s downgrade of US sovereign debt have all steered investors toward alternatives to traditional fiat-based stores of value.
“Bitcoin, often likened to digital gold, is soaking up that demand.
“In a world where sovereign credibility is fraying, investors are shifting decisively into assets that can’t be diluted or manipulated. Bitcoin has become not just a speculative play, but a strategic hedge.”
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