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The British economy was unsettled when former Finance Minister, Kwasi Kwarteng announced a broad-based tax cut without a corresponding revenue source to cushion the cuts and help sustain the economy.
After facing an unprecedented crash for the past few weeks, the British Pound Sterling is recording a new lease of life, riding on the highly anticipated course reversal by the new Finance Minister Jeremy Hunt. The GBP is up 0.8% to $1.1259, extending gains ahead of the announcement slated for 11 am local time today.
The broader market reaction to the change in the Finance Ministry was also seen in the performance of the UK Government Bonds also known as Gilts. With yields moving inversely to prices, the yields on the 10-year gilts dropped 30 basis points to 4.029% on Monday morning while the yields on the 5-year and 2-year gilts fell to 4.013% and 3.663% respectively.
The British economy was unsettled when former Finance Minister, Kwasi Kwarteng announced a broad-based tax cut without a corresponding revenue source to cushion the cuts and help sustain the economy. The UK markets were not prepared for such safe haven revenue sources to be pulled off and stakeholders revolted in what fueled a systemic plunge in the price of stocks and indices across the board.
Though the Bank of England (BoE) has done its best to help prop the market, there were no signs of cooling off, forcing the government to take a more aggressive approach to calm the market. When the pressure was too high to bear, Prime Minister Liz Truss had to fire Kwarteng and the new appointee, Hunt believes some moves were made too fast too soon and there is a need to reverse course.
While Hunt said he will be focused on growth, he said this will not be compromised with stability in any way.
“The drive on growing the economy is right – it means more people can get good jobs, new businesses can thrive and we can secure world-class public services. But we went too far, too fast,” Hunt said in a statement released Saturday.
Making the Right Call to Prop the British Pound
From the time the first fiscal plans were unveiled, a lot of industry and political leaders around the world knew it was a basis to unsettle the markets.
One of the world leaders who expressed pessimism about the Kwarteng tax cuts is United States President Joe Biden. Besides calling the tax cut plans a “Mistake” with an expression of how the economy of other countries can affect the United States, President Biden had reiterated that there was never going to be any interference and that whatever course is adopted in the near term will be up to Great Britain.
“I wasn’t the only one that thought it was a mistake,” Biden said. “I disagree with the policy, but that’s up to Great Britain.”
The International Monetary Fund (IMF) was also against the previous position of the government, and with the course reversal, many are expecting more than the British Pound to benefit in the long run.