London Daily

Focus on the big picture.
Saturday, Jun 21, 2025

Tax rate U-turn lifts pound but markets still fret over government credibility

Tax rate U-turn lifts pound but markets still fret over government credibility

The chancellor's announcement helped lift sterling and UK bond yields, but market commentators say there is still a big question mark hanging over the new government's economic policies.

The pound and government bond yields have recovered some poise in the wake of the government's U-turn on abolishing the top rate of income tax.

Kwasi Kwarteng revealed early on Monday morning that the decision to axe the 45p rate - part of his growth plan revealed last month - would now not happen in April as he had announced just 10 days ago.

The measures were badly received by the financial markets as they were seen as placing too much strain on the public finances, with the tax cuts set to cost £45bn alone.

The crisis of confidence saw sterling hit record lows against the dollar a week ago while the Bank of England later had to intervene to restore market functionality for pension funds when long-dated government bond yields surged.

The yield - the effective interest rate demanded by investors to buy UK government debt - on the 30-year bond had nudged to levels not seen since 2002 before the Bank said it would buy bonds to support the market.

In a statement on Monday afternoon the Bank reaffirmed its commitment to buying up to £5 billion of long-dated gilts at each of its daily auctions. Gilt prices fell sharply in the wake of the announcement, and 30-year yields jumped more than 30 basis points after the announcement.

Monday morning's government climbdown had seen the yield, briefly, climb back to where it was ahead of the mini-budget.

The same could be said for the pound.


'The market was panicking'


But market commentators cautioned that it was likely some respite only.

AJ Bell's investment director, Russ Mould, noted that sterling had jumped from $1.1088 to $1.1264 in less than two hours on Monday morning.

"The U-turn is important for two reasons", he wrote.

"First, the market was panicking about the cost of the tax cuts and how that would push up government debt and in turn raise the prospect of reduced public spending and benefit cuts.

"Removing one of the key components of this seemingly flawed plan provided some relief, and you saw that in how the pound rallied and 10-year gilt rates briefly fell below 4%."

'UK faces challenging times'


"The other factor to consider is that Kwarteng has effectively admitted to a massive policy error only weeks into his tenure as chancellor," Mr Mould continued.

"If Liz Truss is to establish any credibility as prime minister, can she afford to have anyone on her team who has effectively scored an own goal in the opening game?

"The fact that both the pound fell back, and gilt rates started to move higher after the news had been digested, is the market's way of saying there are still plenty of problems with the government's finances, state of the consumer and business, and economic outlook.

"With or without the 45% tax cut, the country still faces challenging times with individuals and companies finding life a lot harder."

Mr Mould noted that the FTSE 100 fell 1% to 6,827 - dragged down by miners, financial services and consumer goods firms.

"Many of these earn in dollars and so a stronger pound - even if just a temporary move - is bad for them", he explained.

The FTSE 100's declines were in line with those on the continent where investors were also reacting to the latest evidence of recession ahead.

Closely-watched surveys of purchasing managers in the manufacturing sector all pointed to slowdowns - largely due to surging inflation.

In the case of the UK, a third consecutive monthly decline in activity was noted with rates of inflation in input costs and selling prices both picking up linked, in part, to the weaker pound.

By market close in London the FTSE 100 had closed up 0.2%, nearly 15 points, ending the day at 6,909.

Newsletter

Related Articles

0:00
0:00
Close
Political Turmoil Resurfaces in Belgium Amid Economic Concerns
Fed policymakers divided on timing of interest rate cuts
Trump signals imminent agreement with Harvard University
Inheritance tax referendum alarms Swiss billionaire community
Japan cancels bilateral security meeting amid US defence demands
AI skeptic Emily Bender warns that ‘the emperor has no clothes’
Israel Confirms Assassination of Quds Force Commander in Tehran
16 Billion Login Credentials Leaked in Unprecedented Cybersecurity Breach
Senate hearing on who was 'really running' Biden White House kicks off
Iranian Military Officers Reportedly Seek Contact with Reza Pahlavi, Signal Intent to Defect
FBI and Senate Investigate Allegations of Chinese Plot to Influence the 2020 Election in Biden’s Favor Using Fake U.S. Driver’s Licenses
Vietnam Emerges as Luxury Yacht Destination for Ultra‑Rich
Plans to Sell Dutch Embassy in Bangkok Face Local Opposition
China's Iranian Oil Imports Face Disruption Amid Escalating Middle East Tensions
Trump's $5 Million 'Trump Card' Visa Program Draws Nearly 70,000 Applicants
DGCA Finds No Major Safety Concerns in Air India's Boeing 787 Fleet
Airlines Reroute Flights Amid Expanding Middle East Conflict Zones
Elon Musk's xAI Seeks $9.3 Billion in Funding Amid AI Expansion
Trump Demands Iran's Unconditional Surrender Amid Escalating Conflict
Israeli Airstrike Targets Iranian State TV in Central Tehran
President Trump is leaving the G7 summit early and has ordered the National Security Council to the Situation Room
Taiwan Imposes Export Ban on Chips to Huawei and SMIC
Israel has just announced plans to strike Tehran again, and in response, Trump has urged people to evacuate
Netanyahu Signals Potential Regime Change in Iran
Juncker Criticizes EU Inaction on Trump Tariffs
EU Proposes Ban on New Russian Gas Contracts
Analysts Warn Iran May Resort to Unconventional Warfare
Iranian Regime Faces Existential Threat Amid Conflict
Energy Infrastructure Becomes War Zone in Middle East
UK Home Secretary Apologizes Over Child Grooming Failures
Trump Organization Launches 5G Mobile Network and Golden Handset
Towcester Hosts 2025 English Greyhound Derby Amid Industry Scrutiny
Gary Oldman and David Beckham Knighted in King's Birthday Honours
Over 30,000 Lightning Strikes Recorded Across UK During Overnight Storms
Princess of Wales Returns to Public Duties at Trooping the Colour
Red Arrows Use Sustainable Fuel in Historic Trooping the Colour Flypast
Former Welsh First Minister Addresses Unionist Concerns Over Irish Language
Iran Signals Openness to Nuclear Negotiations Amid Ongoing Regional Tensions
France Bars Israeli Arms Companies from Paris Defense Expo
King Charles Leads Tribute to Air India Crash Victims at Trooping the Colour
Jack Pitchford Embarks on 200-Mile Walk to Support Stem Cell Charity
Surrey Hikers Take on Challenge of Climbing 11 Peaks in a Single Day
UK Deploys RAF Jets to Middle East Amid Israel-Iran Tensions
Two Skydivers Die in 'Tragic Accident' at Devon Airfield
Sainsbury's and Morrisons Accused of Displaying Prohibited Tobacco Ads
UK Launches National Inquiry into Grooming Gangs
Families Seek Closure After Air India Crash
Gold Emerges as Global Safe Haven Amid Uncertainty
Trump Reports $57 Million Earnings from Crypto Venture
Trump's Military Parade Sparks Concerns Over Authoritarianism
×