By The great Truss retreat on tax saw the pound surge briefly in value, jumping above $1.12, up by round 1 per cent in a matter of minutes just after rumours swirled about the move.
It’s lost some of its bounce though as the financial markets digest the latest political turmoil to beset the UK.
The Prime Minister was hoping to carve out a reputation as the new Iron Lady, instead she will be seen as highly malleable.
She has been manipulated into this U-turn after senior conservatives yesterday coming out in open revolt at the Treasury’s decision to scrap the 45p tax band for the wealthy while refusing to rule out cuts to welfare for the poorest.
Admitting to a communication mistake rather than a serious policy mishap didn’t cut it.
Now this embarrassing climb down, taking unfunded tax cuts off the table, which Chancellor Kwasi Kwarteng has called a distraction, will help reassure the markets a little that the more reckless nature of this new administration can be reined in by the Conservative party.
A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government.
But the credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably.
Kwasi Kwarteng is set to cut a lonely figure on stage at the Conservative party conference later, given that his Prime Minister put the blame for the fiscal bombshell at the door of no.11.
This effort at deflection could be an insurance policy, leaving Liz Truss with the option of changing tack and Chancellor in one fell swoop, a strategy which is more likely to be employed if the pound’s volatility continues in the weeks and months to come.
Joshua Raymond, Director at financial brokerage XTB comments:
“The u turn had been inevitable given the market reaction but there’s every likelihood this will buy the UK government time politically but not necessarily from investors.
The 45p tax cut has taken around £2billion off extra borrowing.
That’s it.
The UK government is facing extra borrowing of closer to £150bn and at higher interest rates than in the past decade.
That’s the problem. Until investors get clarity in the scale of borrowing needed and costs, which means a detailed OBR forecast, the pound Sterling volatility will likely continue.”
The Government need much more than a U-turn on tax cuts for the most wealthy to mitigate the economic turmoil the mini-budget has created, especially for first-time buyers and homeowners. The decision to go back is far too late, with more than four in ten mortgage rates already suspended by lenders and mortgage interest rates skyrocketing.
Vadim Toader, CEO & Co-Founder of neolender, Proportunity, comments:
“To address the backlash hitting the property market, the Government needs to offer prospective buyers support rather than creating barriers.
Those dreaming of their first home and families with no choice but to re-mortgage will be impacted by the rate rises for years to come, feeling the stretch of not only rising energy bills, but unaffordable mortgage rates.
Brokers, fintech’s and lenders are working tirelessly to address the lack of government support, developing unique products to make homeownership not just possible, but affordable.
The key is understanding that support, outside of government, is available.
It’s time for buyers to take matters into their own hands and be empowered with the innovative solutions coming to light.”
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