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.
Business
HSBC ‘being attacked all the time’ by online criminals – as boss ‘kept awake at night’ by cyber threat
The boss of one of the UK’s biggest banks says it is being attacked “all the time” by online criminals and he is kept up at night by cyber threats.
“It does keep me awake,” HSBC UK chief executive Ian Stuart told the Treasury Committee of MPs.
“Because we can be attacked and we are being attacked all the time.”
Money blog: ‘Highest ever’ bank switching offer launches
Mr Stuart said banks were spending “enormous” sums of hundreds of millions of pounds on IT systems – the biggest expense in their businesses.
“Cybersecurity is now very much at the top of our agenda,” he added.
Ian Stuart, chief executive of HSBC UK, appearing before the Treasury Committee. Pic: PA
Concerns were also highlighted by Lloyds Bank chief executive Charlie Nunn, who said financial fraud will get worse if banks cannot intervene to prevent it and social media and telecoms companies are not incentivised to halt it.
Mr Nunn said the UK “has become the home of fraud”, adding that the number of victims is “pretty disturbing” and “individual cases are harrowing”.
Major high street businesses, including M&S and the Co-op, have been hit by cyber attacks in recent weeks and had their operations impacted.
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Who is behind M&S cyberattack?
Cybersecurity threats, however, were not behind the several-day outage at Barclays at the end of January, its UK chief executive Vim Maru said.
He added: “We’ve learned the lessons. We’re acting on the lessons, both work done internally, but also with help from third parties as well.
Account holders across the UK have suffered a spate of IT glitches from different banks around paydays this year.
Tens of millions of pounds on IT have been spent and customer glitches have fallen, Mr Maru said.
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Could ageing tech be behind banking outages?
He added that the problem at Barclays was a software issue, saying: “We put a fix in place that means that we won’t have a recurrence.”
The steel tycoon Sanjeev Gupta is mounting a last-ditch bid to salvage his British operations after seeing an emergency plea for government support rejected.
Sky News has learnt that Mr Gupta’s Liberty Speciality Steels UK (SSUK) arm is seeking to adjourn a winding-up petition scheduled to be heard in court on Wednesday.
The petition is reported to have been brought by Harsco Metals Group, a supplier of materials and labour to SSUK, and is said to be supported by other trade creditors.
Unless the adjournment is granted, Mr Gupta faces the prospect of seeing SSUK forced into compulsory liquidation.
That would raise questions over the future of roughly 1,450 more steel industry jobs, weeks after the government stepped in to rescue the larger British Steel amid a row with its Chinese owner over the future of its Scunthorpe steelworks.
If Mr Gupta’s operations do enter compulsory liquidation, the Official Receiver would appoint a special manager to run the operations while a buyer is sought.
A Whitehall insider said talks had taken place in recent days involving Mr Gupta’s executives and the Insolvency Service.
Steel industry sources said the government could conceivably be interested in reuniting the Rotherham plant of SSUK with British Steel’s Scunthorpe site because of the industrial synergies between them, although it was unclear whether any such discussions had been held.
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Mr Gupta is said to have explored whether he could persuade the government to step in and support SSUK using the legislation enacted last month to take control of British Steel’s operations.
Whitehall insiders said, however, that Mr Gupta’s overtures had been rebuffed.
He had previously sought government aid during the pandemic but that plea was also rejected by ministers.
The SSUK division operates across sites including at Rotherham in south Yorkshire and Bolton in Lancashire.
It makes highly engineered steel products for use in sectors such as aerospace, automotive and oil and gas.
A restructuring plan due to be launched last week was abandoned at the eleventh hour after failing to secure support from creditors of Greensill, the collapsed supply chain finance provider to which Mr Gupta was closely tied.
Under that plan, creditors, including HM Revenue and Customs, would have been forced to write off a significant chunk of the money they are owed.
The company said last week that it had invested nearly £200m in the last five years into the UK steel industry, but had faced “significant challenges due to soaring energy costs and an over-reliance on cheap imports, negatively impacting the performance of all UK steel companies”.
It adds: The court’s ability to sanction the plan depended on finalisation of an agreement with creditors.
“This has not proved possible in an acceptable timeframe, and so Liberty has decided to withdraw the plan ahead of the sanction hearing on May 15 and will now quickly consider alternative options.”
One source close to Liberty Steel acknowledged that it was running out of time to salvage the business.
They said, however, that an adjournment of Wednesday’s hearing to consider the winding-up petition could yet buy the company sufficient breathing space to stitch together an alternative rescue deal.
A Liberty Steel spokesperson said on Tuesday: “Discussions continue with creditors.
“Liberty understands the concern this will create for Speciality Steel UK colleagues and remains committed to doing all it can to maintain the Speciality Steel UK business.”
The Insolvency Service and the Department for Business and Trade have also been contacted for comment.
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