London Daily

Focus on the big picture.
Friday, Oct 09, 2026

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
UK and Germany Finalize Kensington Treaty to Strengthen Defense and Technology Cooperation
Britain Maintains Diplomatic Mission in East Jerusalem Despite Israeli Closure Deadline
English Councils Push Government to Rethink Proposed Funding Cuts
Scottish Homebuilding Falls to Lowest Level in 11 Years
BBC Chief Matt Brittin Defends Restructuring as Staff Challenge Job Cuts
UK Finance Warns High Energy Costs and Bond Yields Are Complicating Fiscal Outlook
UK Adopts All 44 Recommendations on Regulating AI in Healthcare
Chancellor John Healey Prepares Autumn Budget as Borrowing Costs Strain Public Finances
UK Investigators See Strong Indications of Iranian Link After RAF Fairford Security Operation
Laura Trott Pledges Tighter Controls on Political Activism in UK Classrooms
Welsh Ministers Launch Long-Term Review of North Wales and Anglesey Crossings
Welsh Government Orders 18-Month Study of Road Solutions Around Newport
Reform UK MP Sarah Pochin Faces Scrutiny Over £800,000 Second Home Purchase
British Households Grow More Concerned About Fuel and Energy Prices
NHS Leaders Warn of Rising Winter Pressure on Emergency Departments
Kemi Badenoch Proposes £2.3 Billion Employer National Insurance Cut for Young Workers
Middle East Conflict Could Erase UK Fiscal Headroom, Economists Warn
Manchester City Found Guilty of Multiple Premier League Financial Rule Breaches
UK Security Services Find Strong Indications of Iranian Role in RAF Fairford Incident
Costa Coffee Returns to Operating Profit on Iced Drinks and Menu Changes
Asos Warns Customers After Unauthorized Access to Retail App and Data
Kemi Badenoch Puts Growth and Deregulation at Center of Conservative Conference
Campaigners Warn of Deepening Social Care Crisis for Disabled Adults
Study Finds Rising Early-Onset Cancer Rates Among Adults Under 50 in Britain
UK Coach Operators Warn High Diesel Prices Could Force Route Cuts
FCA Opens Independent Review Into Handling of Epstein-Linked Whistleblower Case
Argentina Vows to Block Falkland Islands Offshore Oil Development
UK Chancellor Prepares Fiscal Measures and Welfare Reforms Ahead of Autumn Budget
Sainsbury’s and Morrisons Explore Potential Multi-Billion-Pound Merger
UK Weighs Tariffs on Chinese Electric Vehicles to Align With European Union
UK Threatens Diplomatic Expulsions Over Planned Closure of East Jerusalem Consulate
UK Energy Price Cap Hits Three-Year High as Middle East Conflict Raises Costs
Seventh Arrest Made in Suspected Terror Plot at RAF Fairford
Systemic Education Collapse Sparks Mass Student Uprisings in France
Green Party Faces Backlash Over Resolution Equating Zionism With Racism
Conservatives Debate Scrapping Environmental Rules for New Homes
Cornwall Insight Warns UK Energy Bills Could Approach £2,000 This Winter
UK Coach Operators Warn of Service Cuts as Diesel Prices Exceed £2
Scottish Parliament Approves £68 Billion Budget With New Tax and Property Measures
FCA Opens Independent Review Into Handling of Epstein Whistleblower
UK Government Drops Plan to Suspend Jury Trials in England and Wales
Bank of England Holds Interest Rate at 3.75% as Markets Watch November
Two Iranian Nationals Charged Over Alleged Plot Targeting Manchester Jewish Community
UK Fiscal Headroom Halves to £11 Billion Ahead of Budget, EY Warns
US Bomber Withdrawal From RAF Fairford Prompts UK Security Review
Sarah Wakfer Appointed Chair of Northern Ireland’s Health and Care Regulator
Scotland Housing Completions Fall to 11-Year Low Amid National Shortage
UK Water Companies Face Tougher Oversight and Unannounced Regulatory Inspections
Middle East Conflict Pushes UK Fuel and Wholesale Energy Prices Higher
Andy Burnham Raises Prospect of Second Brexit Referendum in Review of UK-EU Relations
×