The pound fell more than one per cent against the dollar to as low as $1.0763 in early morning trade today – as Liz Truss insisted the mini-budget was the ‘right’ thing to do despite financial turmoil.
Sterling fell on Thursday with 10am figures showing the pound at $1.0795, compared with $1.0830 at the previous close.
The FTSE-100 fell almost 2% before recovering to -1.17%, with the index at 9.45 a drop of 107.53 to 6897.86.
Ten-year gilt yields fell 50 bps to 4.01%, and two-year yields fell similarly to 4.24%. This happened after the Bank of England (BoE) intervened in the bond markets to avert another financial disaster.
The BoE pledged to buy as many of the long-term government bonds, or gilts, needed to calm markets, which have been plagued by concerns that last week’s budget will send debt soaring.
The BoE’s move “certainly raised the level of concern about the potential downside economic and financial markets, as a result of the loss of confidence in the UK’s public finances”, said MUFG analyst Lee Hardman.
Breaking her silence after nearly a week of financial market chaos, Prime Minister Liz Truss defended her economic plan and said she was willing to take “controversial” steps to restore growth.
“This is the right plan we have put out,” she said in a series of interviews with local BBC radio stations on Thursday morning.
Asked if she would overturn the mini-budget that shocked markets with the scale of its tax cuts and government borrowing, Mrs Truss said: ‘I don’t accept the premise of the question.’
She added: ‘We are facing difficult economic times. I do not deny this. This is a global problem. But what is absolutely right is that the British Government has stepped in and acted at this difficult time.’
That’s what the Prime Minister said today the government had to take immediate action to ignite economic growth in defense of her tax relief budget as gilt yields began to rise again.
She told BBC local radio that the plan was designed to put Britain on a better path in the long term and she was prepared to take tough decisions to help households and businesses through what is expected to be a very tough winter.
She said the government was working very closely with the Bank of England.
Asked in an interview if it was time to reverse the mini-budget, Mrs Truss said: ‘No, it’s not because… the majority of the package we announced on Friday was support for energy for individuals and businesses , and I think it was the right thing to do.’
“I have to do what I think is right for the country,” she said – adding that she is prepared to make difficult decisions.
Prime Minister Liz Truss still defended her economic plan, saying on Thursday she was willing to take “controversial” steps to restore growth
The Budget’s sweeping tax cuts and energy price freeze aimed at boosting Britain’s recession-threatened economy had sent bond yields soaring and the pound collapsed to a record low of $1.0350 on Monday as traders worried it would derail public finances.
The BoE move came after the International Monetary Fund criticized the latest budget announcement, claiming it could increase inequality and worsen inflation.
Finance Chancellor Kwasi Kwarteng sparked jitters in financial markets last week when he delivered a plan to cut taxes without detailing the impact on public finances or how the government would reform the economy to stimulate growth.
The pound sank and government bond yields rose, forcing the BoE to revive its emergency bond-buying program on Wednesday to support pension funds.
Kwasi Kwarteng meets investment banks to offer reassurance after his tax-cutting budget spooks traders
Mrs Truss said the Government needed to take swift and decisive action to protect households and businesses from rising energy bills.
“Of course, this means making controversial and difficult decisions. But I am prepared to do that as Prime Minister, because what is important to me is that we get our economy going”.
Asked about the fairness of the “Robin Hood” budget, she said: “It’s not fair to have a recession… it’s not fair to have fewer jobs in the future because we have the highest tax burden.”
Ahead of her appearances, allies insisted she has no plans to deviate from Kwasi Kwarteng’s economic plan outlined in Friday’s mini-budget.
His announcement that he was scrapping the 45p top rate of income tax and cutting other levies such as corporation tax and national insurance while increasing UK borrowing has sparked calls for him to quit or be replaced.
But Mrs Truss is said to have ruled out sacking him less than a month into his appointment or making concessions to the financial meltdown.
Investors, businesses and consumers are now waiting for the government to release more details on how it plans to get the economy growing faster, which will be key to fixing the country’s increasingly stretched public finances.
“Every day, every week, every month the government will now be criticized by markets and businesses about how serious they are about growth and about their fiscal responsibility to repay debt,” Tony Danker, director general of the Confederation of British Industry, said.
Former BoE governor Mark Carney criticized the plan to cut taxes, saying it had undercut the BoE’s efforts to curb inflation and sowed chaos in financial markets.
“Unfortunately, having a partial budget in these circumstances – tough global economy, tough financial market position, working across the board with the bank – has led to quite dramatic movements in the financial markets that we’ve all seen,” Carney told the BBC.
Chief Minister for the Treasury Chris Philp said the government would stick to its plan to hold a fuller fiscal policy announcement on November 23, where it will outline further details of how it will cut the debt.
But some financial analysts said the government may have to make this announcement to calm investors’ nerves.
Jonas Goltermann, senior market economist at consultancy Capital Economics, said: ‘I don’t think (the BoE’s intervention) will be a long-term boost for the pound, although it may prevent an extreme downturn. He added that he believes further falls in the pound are likely.