Pound rises and borrowing costs fall as investors back Hunts U-turn

Jeremy Hunt announces changes to measures from mini-budget

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Shares also rallied as investors welcomed the Government’s U-turn on nearly all the tax cuts announced last month. However, there were also warnings that Mr Hunt and crisis-hit Prime Minister Liz Truss still have a battle on their hands, with the economy at risk of falling into recession, inflation at a 40-year high and the nation’s debt standing at £2.4trillion.

While most of the U-turns received widespread backing, there were concerns that ditching the Government’s two-year energy price guarantee – watered down to a sixmonth promise – could cause a devastating bill shock for millions of households and businesses next spring.

Mr Hunt said the tax changes would raise £32billion a year in extra revenues as he sought to end the chaos in the bond market that followed the Government’s previous plan.

It still leaves a potential black hole of around £40billion, but the about-face appeared to reassure financial markets – for now at least.

The pound jumped against the dollar, and was around two per cent higher at $1.14 towards the end of the day.

While that only took sterling back to where it was in early October, it contrasts sharply with the $1.06 that the pound slumped to after last month’s mini-Budget.

The weak pound has pushed up import costs and threatens to add to the current inflationary pressures.

Bond yields – the interest rate on UK Government borrowing – also eased yesterday.

The yield on 30-year gilts dropped to 4.3 per cent, down from nearly five per cent in late September, but still much higher than under 3.7 per cent early last month and just 0.8 per cent in December 2021.

Rates on other Government bonds also fell.

The FTSE 100 index rose 61.45 points to 6,920.2, while the FTSE 250 – a better reflection of UK-focused firms – leapt 470 points to over 17,500.

Russ Mould, investment director at broker AJ Bell, said: “Achieving some degree of near-term calm is a good thing. But neither Mr Hunt nor Liz Truss can rest on their laurels.

“The medium-term challenge of navigating a path between recession and inflation remains and then come the long-term tasks of picking sterling off the floor and managing the nation’s £2.4trillion national debt.”

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said: “The Chancellor has bought himself some time, but more will need to be done and there is absolutely no room for error in the Halloween Budget.”

Business groups yesterday broadly backed the Government’s near ripping-up of sacked Mr Kwarteng’s plans.

Rain Newton-Smith, chief economist at the CBI, said: “The Chancellor is acting swiftly and firmly in looking to restore confidence to markets and businesses.”

It was a view echoed by the Institute of Directors, whose chief economist Kitty Ussher said: “As our members have told us, the number one negative issue for their businesses at the moment is UK economic conditions.

“Confidence is also extremely low, which in turn causes businesses to invest less, constraining growth further.”

But Shevaun Haviland, director general of the British Chambers of Commerce, said: “What we’ve seen from him is a plan for today and nothing for tomorrow.”

She added that companies would be “dismayed” by the decision to cut back energy support for households and firms from next April.

She said: “The Government must commit to a full consultation with firms ahead of that cliff-edge to provide some certainty on where any targeted support will go.”

Mr Hunt promised a Treasury-led review for support beyond next April.

Experts fear the move could see households who were expecting average bills to be capped at £2,500 a year to instead suffer them soaring to more than £4,300 from next spring.

Consumer champion Martin Lewis, founder of Money Saving Expert, said: “Getting rid of it in April won’t be a problem as long as the net for the support that remains is stretched high enough.

“It cannot just be support for those on benefits and pensioners and those with disabilities. It will need to stretch to help for those who are on middle incomes too.” But

Adam Scorer, chief executive of the charity National Energy Action, warned vulnerable households were being “tossed around like rag dolls”.

He added: “In seeking the confidence of markets, the Government has created huge uncertainty for households.”

The Bank of England is due to vote on whether to hike rates again in early November. The central bank, under Governor Andrew Bailey, has also been forced to intervene in the financial chaos of late by buying up billions of pounds worth of government bonds to prop-up pension funds that were facing a cash crunch.

Meanwhile, there was also hope of calm in the mortgage market after the mayhem caused by the mini-Budget saw interest rates soar and lenders pull swathes of products.

Data from experts Moneyfacts yesterday showed the average two-year fixed rate mortgage remained at 6.47 per cent.

The number of mortgage deals on offer also stayed at just over 3,100, having plunged to 2,258 at the start of October.

Ray Boulger, from experts John Charcol, said: “It will always depend on individual circumstances but in general I think mortgage fixed rates are close to a peak and we will start to see rates falling by next week.

“Therefore, anyone who can wait should talk to their broker now so they are ready but delay choosing a lender and rate.”

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