U.K. tax cut proposals reverberate across markets

Britain’s central bank issued a rare statement on Monday that failed to stem the country’s currency’s freefall, as the U.K. government’s tax-slashing proposals continue to spark turmoil across financial markets.

What they’re saying: The Bank of England “will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term,” the statement reads.

  • The central bank is watching developments in financial markets and “will make a full assessment at its next scheduled meeting of the impact on demand and inflation from the Government’s announcements, and the fall in sterling, and act accordingly.”
  • The announcement falls short of what some economists and market-watchers began calling for in recent days: an emergency rate hike.

Why it matters: There are concerns the U.K.’s tax-cutting spree is fiscally unsustainable, may stoke already-soaring inflation, and could require an even tighter monetary policy.

  • The result is an unusual (and worrying) combination of market moves for a country like the U.K. The pound plummeted to an all-time low against the dollar, while government yields saw some of the biggest spikes on record.

The latest: The Bank of England’s statement didn’t stop the pound’s free fall.

  • In early trading on Monday, the pound crashed. At its lows, it took $1.03 to buy one pound. After regaining some ground earlier, it slid again after the statement’s release.
  • Big action, too, came in the bond market. For a sense of the stunning rise in borrowing costs, consider this: On Thursday, before the government unveiled its proposals, the yield on the U.K.’s benchmark five-year bond hovered near 3.58%. Now, as of noon EDT, it’s sitting at 4.54%.

Source: https://www.axios.com/2022/09/26/uk-pound-liz-truss-tax-cuts
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The Article Was Written/Published By: Courtenay Brown

Author: axios