London Daily

Focus on the big picture.
Sunday, Jun 01, 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
Hegseth Warns of Potential Chinese Military Action Against Taiwan
OPEC+ Agrees to Increase Oil Output for Third Consecutive Month
Jamie Dimon Warns U.S. Bond Market Faces Pressure from Rising Debt
Turkey Detains Istanbul Officials Amid Anti-Corruption Crackdown
Taylor Swift Gains Ownership of Her First Six Albums
Bangkok Ranked World's Top City for Remote Work in 2025
Satirical Sketch Sparks Political Spouse Feud in South Korea
Indonesia Quarry Collapse Leaves Multiple Dead and Missing
South Korean Election Video Pulled Amid Misogyny Outcry
Asian Economies Shift Away from US Dollar Amid Trade Tensions
Netflix Investigates Allegations of On-Set Mistreatment in K-Drama Production
US Defence Chief Reaffirms Strong Ties with Singapore Amid Regional Tensions
Vietnam Faces Strategic Dilemma Over China's Mekong River Projects
Malaysia's First AI Preacher Sparks Debate on Islamic Principles
White House Press Secretary Criticizes Harvard Funding, Advocates for Vocational Training
France to Implement Nationwide Smoking Ban in Outdoor Spaces Frequented by Children
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
Russia's Fossil Fuel Revenues Approach €900 Billion Since Ukraine Invasion
U.S. Justice Department Reduces American Bar Association's Role in Judicial Nominations
U.S. Department of Energy Unveils 'Doudna' Supercomputer to Advance AI Research
U.S. SEC Dismisses Lawsuit Against Binance Amid Regulatory Shift
Alcohol Industry Faces Increased Scrutiny Amid Health Concerns
Italy Faces Population Decline Amid Youth Emigration
U.S. Goods Imports Plunge Nearly 20% Amid Tariff Disruptions
OpenAI Faces Competition from Cheaper AI Rivals
Foreign Tax Provision in U.S. Budget Bill Alarms Investors
Trump Accuses China of Violating Trade Agreement
Gerry Adams Wins Libel Case Against BBC
Russia Accuses Serbia of Supplying Arms to Ukraine
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
Chinese Woman Dies After Being Forced to Visit Bank Despite Critical Illness
President Trump Grants Full Pardons to Reality TV Stars Todd and Julie Chrisley
Texas Enacts App Store Accountability Act Mandating Age Verification
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Vatican Calls for Sustainable Tourism in 2025 Message
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
Trump Threatens 25% Tariff on iPhones Amid Dispute with Apple CEO
Putin's Helicopter Reportedly Targeted by Ukrainian Drones
Liverpool Car Ramming Incident Leaves Multiple Injured
Australia Faces Immigration Debate Following Labor Party Victory
Iranian Revolutionary Guard Founder Warns Against Trusting Regime in Nuclear Talks
Macron Dismisses Viral Video of Wife's Gesture as Playful Banter
Cleveland Clinic Study Questions Effectiveness of Recent Flu Vaccine
Netanyahu Accuses Starmer of Siding with Hamas
Junior Doctors Threaten Strike Over 4% Pay Offer
×