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Pound hits two-week high after debt plan U-turn

3 years ago
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Pound hits two-week high after debt plan U-turn

The pound has risen to its highest level for two weeks after the chancellor attempted to reassure investors by pledging to bring forward details of how he would cut debt.

It rose above $1.14, recovering after Kwasi Kwarteng’s plans to fund tax cuts by extra borrowing worried investors.

He will explain how the cuts will be paid for this month, having previously said he would wait until 23 November.

Fears his plans are unaffordable sparked turmoil on markets last week.

Conservative MP Mel Stride, chair of the Treasury Select Committee, told the BBC’s Today programme the plan to cut debt would be “critical in calming the markets”.

In the wake of the mini-budget, the pound slumped to a record low, government borrowing costs surged and the Bank of England was forced to step in and take emergency action after the dramatic market movements put some pension funds at risk of collapse.

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The market turmoil was fuelled by the lack of an independent assessment on the impact of the plans, which had been offered by independent forecaster the Office for Budget Responsibility (OBR), but was declined by the government.

Investors also bet interest rates would rise faster than previously thought, leading banks to withdraw mortgage products as the uncertainty made long-term loans difficult to price.

Stride said if the OBR forecast stacks up then interest rate expectations could fall “which is going to matter to millions of people up and down the country when it comes to their mortgages”.

After a backlash from Tory MPs, Mr Kwarteng made two dramatic U-turns on Monday, first declaring he would not scrap the top rate of tax for the highest paid and then later agreeing to bring forward his plan to cut debt.

What does value of pound mean for my finances?

A fall in the value of the pound will increase the price of goods and services imported into the UK from overseas.

That’s because when the pound is weak against the dollar or euro, for example, it costs more for companies in the UK to buy things such as food, raw materials or parts from abroad.

Firms could choose to pass on those higher prices to their customers. And that could push up inflation, which tracks how the cost of living changes over time.

This is now due to published later this month, ahead of 3 November when the Bank of England next meets to make its latest decision on interest rates.

Interest rates have risen seven times since December as the Bank tries to curb inflation – the rate at which prices rise. This is currently at a nearly 40-year-high of 9.9%.

After last week’s turmoil investors were estimating interest rates could reach more than 6% next year – although expectations have since edged back to around 5.4%.

Raising interest rates makes it more expensive to borrow which should, in theory, encourage people to spend less and cool prices, but it also makes borrowing money for mortgages or other loans more expensive.

Stride said: “If [the OBR forecast] is well received… you might expect the [Bank of England] to come up with a lower level of interest rate rises, which of course once again will be very helpful for those with mortgages, business borrowing, and indeed for the cost of the government servicing its own debt.”

However, he said there were doubts over whether the OBR would give the government its blessing.

Stride said much would ride on the government proving that its policies can, as promised, boost economic growth to a rate of 2.5% a year which will be “difficult to do”.

Failing that, Mr Stride said the government would have to “row back” on other promised tax cuts or “lean into” public spending cuts at time of soaring inflation, which could meet fierce resistance.

Prime Minister Liz Truss has refused to confirm whether benefits will rise with inflation, a change that would save about £5bn.

But Penny Mourdant, Leader of the House of Commons, has openly opposed the idea telling Times Radio: “We’re not about trying to help people with one hand and take it away with another.”

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