On Friday Sep 23, the pound fell to a new 37 year low against the dollar and stock prices hit six month lows after UK finance minister Kwasi Kwarteng laid out a series of tax cuts in a bid to boost growth.
The package, estimated to cost 45 billion pounds US $50 billion by the financial year 202627, was the largest event at a single event since 1972, according to the Institute for Fiscal Studies, a think tank.
Income tax cuts, a drop in property taxes, a drop in tax-free shopping for overseas visitors and the scrapping of a planned corporation tax rise are all aimed at giving households and businesses a boost.
The debt management arm said it would raise its borrowing plan for the current financial year by 45 per cent to 234 billion pounds, and to fund the cuts, as well as a multi-billion pound scheme to subsidise energy bills.
The bond market went into a tailspin with yields on the five-year gilt, one of the most sensitive to any near-term shift in interest rate or borrowing expectations, up by half a percentage point. According to Refinitiv data, this was the biggest one-day rise since at least late 1991.
Bethany Payne, global bond portfolio manager, Janus Henderson Investors, said that this huge fiscal event is a radical economic gamble, a Go big or go home'' gamble that will put UK debt on an unstable footing.
We were worried about the ability of the Bank of England to sell gilts through the quantitative tightening due to start on October 3, but today we are asking whether quantitative tightening is over before it even begins. Bond holders were already worried about inflation and the possibility of more interest rate hikes from the Bank of England BoE, which on Thursday raised rates by a half-point to 2.25 per cent.
This is fiscal stimulator at a time when the Bank of England is already worried about aggregate demand, and it is highly likely that the Bank of England will raise rates even more than we thought they were going to do, according to David Page, AXA Investment Management head of macro research.