The so-called “mini-budget” by the new British government on Friday triggered a level of market volatility not seen in the country since the collapse of Covid or the major financial crisis.
A package of tax cuts expected for Total £45 billion In the coming years, combined with a massive increase in spending to help families and businesses deal with rising energy bills, investors have been left worried about the UK’s future as it takes on higher levels of debt. That was despite Finance Minister Kwasi Koarting’s target of a 2.5% growth trend and his pledge to launch a plan to reduce debt as a percentage of GDP over the medium term.
it comes Inflation remains at 9.9%. and the country It may have already entered a recession.
Here were some repercussions:
pound plunge
Sterling’s response to the government’s announcement was almost immediate and extreme.
The pound lost nearly 3.6% against the dollar on Friday and continued to decline on Monday when the market reopened. It reached an all-time low below $1.04 early Monday morning in London.
It has since recovered slightly, trading around $1.08 at 8:30 am on Tuesday, but it remained at a 37-year low – until last week. It’s down from $1.35 at the beginning of the year.
While some supporters of the government’s plan have pointed out that the dollar’s bullish trend this year is the reason for the pound’s decline, the pound has also fallen against the euro.
The euro is currently trading around £0.89 – up from £0.84 at the start of the year – although the eurozone faces significant challenges of its own, from the energy crisis to rising recession risks.
Bond moves
UK government bond yields skyrocketed in the wake of the government’s budget – which means their prices have fallen dramatically (bond yields move inversely with prices).
gilded yield It is now poised for its biggest monthly rise since at least 1957, according to a Reuters analysis of data from both Refinitiv and the Bank of England.
return on 10 year gold bondWhich affects mortgages and other borrowing rates, it rose from 2.882% to 4.073% so far in September.
Higher yields and a falling sterling prompted some mortgage lenders to pause new home loans and withdraw some mortgage offers.
More price hike?
The main question now is whether it was the Bank of England, who actually did this raise interest rates From 0.1% to 2.25% over the past nine months, it will be pushed into faster and higher rate increases.
On Monday, Governor Andrew Bailey He said The bank will not hesitate to change interest rates as necessary. However, he said that a decision will be taken at its next meeting scheduled for November, to reduce speculation of an emergency interest rate hike or intervention to support the pound.
The UK overnight swap market now points to an 80% chance of a rally to 3.5% by November 3, which would be a 125 basis point rise, and a 20% chance of a higher rally to 3.75%.
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