Britain’s political and market turmoil

Posted on October 17, 2022Comments Off on Britain’s political and market turmoil
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© Reuters. FILE PHOTO: People walk through the City of London financial district during rush hour in London, Britain, October 3, 2022. REUTERS/Henry Nicholls

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LONDON (Reuters) – New British finance minister Jeremy Hunt, seeking to stem a dramatic loss of confidence among investors in Prime Minister Liz Truss’s government, will announce tax and spending measures on Monday, two weeks earlier than scheduled.

Truss fired her finance minister Kwasi Kwarteng on Friday and scrapped parts of their economic package in a desperate bid to save her premiership after a Sept. 23 package of unfunded tax cuts hit sterling, sent borrowing costs surging and forced the Bank of England to intervene.

Following is a snapshot of related events, comments and explanations:

WHAT’S BEHIND THE CRISIS?

* The Bank of England was forced into emergency bond-buying to stem a sharp sell-off in Britain’s 2.1 trillion pound ($2.3 trillion) government bond market that threatened to wreak havoc in the pension industry and increase recession risks.

* The sell-off began after Kwarteng’s tax-cut announcement last month.

* After firing Kwarteng, a close friend and ally, Truss announced that corporation tax would rise to 25% as intended by her predecessor Boris Johnson, reversing her earlier plan to freeze it at 19%. Kwarteng’s cut to the highest rate of income tax had already been reversed.

* The BoE interventions have highlighted a growing segment of Britain’s pensions sector – liability-driven investment.

* LDI helps pension funds use derivatives to “match” assets and liabilities to avert risks of shortfalls in payouts, but the soaring interest rates have triggered emergency collateral calls for those funds to cover the derivatives.

MARKET REACTION

* Long-dated British government bonds rallied on Monday. Yields on 20- and 30-year gilts slid by around 23 basis points shortly after the markets opened at 8 a.m. (0700 GMT), reversing sharp rises seen on Friday when a statement by Truss failed to reassure investors about the government’s fiscal plans.

* was up about 0.8% against the dollar in Asian trading early on Monday.

* The BoE bought 1.3207 billion pounds ($1.48 billion) of long-dated government bonds at its final reverse auction on Friday, taking total purchases of conventional and index-linked gilts since Sept. 28 to 19.3 billion pounds.

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