Pound Sterling in Highly Volatile Reaction to Kwarteng’s Fiscal Statement

Kwarteng fiscal event and the Pound

Above: Chancellor Kwarteng delivers a statement on fiscal changes to the House of Commons.

This is a bold statement of intent by the government of Liz Truss, her mission statement is clear and it remains to be seen whether it works. If it does, the Pound faces a brighter future, if it doesn’t surely record lows beckon.

The British Pound was seen higher against a number of currencies and recovering against the Dollar following a swathe of fiscal changes announced by Chancellor Kwasi Kwarteng.

But, a huge sell-off suddenly rocked the currency at 10:40, confirming the market was struggling to make up its mind as to the direction the UK economy was set.

Kwarteng announced in his Growth Plan 2022 significant cut to the UK’s debt burden in an effort to boost UK economic growth.

The moves amount to the biggest tax cut program since 1972.

Headline announcements include the cutting of the basic rate of Income Tax from 20p to 19p, from April 2023.

The top rate of income tax was cut from 45p to 40p, in order “to attract global talent and incentivise enterprise,” said the government.

The developments amount to a significant increase in the UK’s tax burden and government bonds fell in response.

IFS tax cuts

In the wake of the announcement, money market pricing showed traders now put 50% odd on a 100 basis point hike at the Bank of England in November.

This shows the market believes the measures taken by the Government will stimulate growth, but cruciallygrowth that would stimulate longer-term inflation.

Yields paid on five-year UK government bonds shot higher by 50 basis points, which puts it on course for its biggest rise on record.

Ten year-yields reached seven-year highs.

The Pound initally went higher in response to the announcements, suggesting there is something in the statement the markets liked.

But at 10:40 BST a sudden sell-off occured.

Below is a snapshot of the Pound to Euro exchange rate highlighting the volatility:

GBP / EUR reactions

Above: GBP / EUR at five-minute intervals.

Looking at key Sterling rates at the time of this article’s update, the Pound to Euro exchange rate is 0.50% lower on the day at 1.1385, taking bank transfer rates to 1.1150 and rates offered at independent payment providers to 1.1350.

The Pound to Dollar exchange rate went to 1.12, having been as low as 1.1090 earlier in the day. Bank transfer rates on dollar payments are seen at 1.0870 and independent payment provider rates were seen at 1.1060.

The currency market’s reaction is therefore an evolving one.

Indeed, the government drove through the biggest tax cut program since 1972, greater even than those made by Margret Thatcher’s chancellor Nigel Lawson.

The government also released a tentative costing on their new measures.

The cost of the tax cuts alone will come to £ 45BN in a few years.

This comes on top of the multi-billion pound program to cap house hold energy bills.

Other tax measures include the cutting of Stamp Duty Land Tax: first time buyers will now only pay duty on homes over £ 425K, up from £ 300K.

First time buyers relief is available on properties up to £ 625K, up from £ 500k. The nil-rate band will be doubled for all buyers to £ 250k.

From 6th November the government is cutting National Insurance by 1.25 percentage points and canceling the Health & Social Care Levy.

Alcohol duty will be frozen from February 2023, a move the Kwarteng believes will help the hospitality industry bounce back.

To support businesses to invest and grow, Kwarteng says the Annual Investment Allowance will be permanently set at its highest ever level of £ 1 million from 1 April 2023.

This will give 100% tax relief to businesses on their plant and machinery investments up to the level of £ 1 million.

The planned Corporation Tax increase to 25% has been canceled, ensuring the rate will stay at 19%, the lowest in the G20.

The government has meanwhile agreement in principle with 38 areas to establish tax-cutting Investment Zones which will drive growth & unlock housing development.

New legislation to reform planning permission for major infrastructure projects would also be introduced over coming weeks.

This is a bold statement of intent by the government of Liz Truss, her mission statement is clear and it remains to be seen whether it works. If it does, the Pound faces a brighter future, if it doesn’t surely record lows beckon.

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