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The pound surged against the US dollar yesterday as interest rates rose. This report comes after the UK finance minister rolled back the controversial tax-cut plans. Meanwhile, the UK bond yields fell after the announcement. The ten-year gilt bond yields dropped to trade at around 3.972% by 41 basis points. The 30-year index-linked bond yields fell to 4.369% by 48 basis points, and the 20-yield bond yields to 4.444% by 45 basis points.
The sterling pound was up 2.3%, extending gains following a rising morning session. Generally, these market changes occurred after a dramatic British politics day last Friday. It included a substantial U-turn from the prime minister and the sacking of the finance minister. His replacement made an emergency fiscal statement at about 11:00 am UK time. The most significant part of the U-turn involved scrapping the tax cut in the lowest income tax rate from 20% to 19%.
It also involved the freeze on alcohol duty rates, VAT claim-backs for tourists, the off-payroll working reforms reversal, and cuts to dividend tax rates. In any case, these announcements came two weeks before the schedule. The complete medium-term fiscal plan will be available on 31st October, together with the IOBR (Independent Office for Budget Responsibility) forecast. The IOBR report was unavailable in the mini-budget announcement that roiled the UK bond markets on 23rd September.
For that reason, experts are wary that the UK bond markets remain unpredictable. After the announcement in late September, the IMF (International Monetary Fund) announced a damning verdict regarding the debt-funded tax cuts. The IMF verdict led to the sterling pound hitting a record low and the UK bonds making a sharp sell-off in the days afterward. The International Monetary Fund, in a rare statement, announced the plans that the UK government laid out would likely pump up inequality.
Besides, the IMF stressed that it cannot recommend untargeted and large fiscal packages right now. Meanwhile, the US president talked about the British economy during the weekend, referring to the tax-cut plan as a mistake. He explained that the plan could hurt other nations’ monetary policies. Overall, markets remain non-reassured due to this move, as the pound surged by around 1.1% following the speech.
Thus, many political analysts cautioned the UK prime minister’s poor performance, piling yet extended pressure on her with lawmakers asking her to step down. Some substantial lawmakers calling on her to step down include the opposition party leader and some members of her party. It is crucial to note that prices in the UK are soaring, and the inflation rate keeps prompting further rate hikes. The economic outlook still threatens a possible recession, and the decisions were a massive capitulation pressurizing the financial markets.