British borrowing costs surge, sterling plunges after new economic plan

British borrowing costs surge, sterling plunges after new economic plan

LONDON: British government bond yields surged by the most in a day in over three decades on Friday (Sep 23), the pound slid to a fresh 37-year trough against the dollar and stocks hit six-month lows after UK finance minister Kwasi Kwarteng laid out a series of tax cuts in a bid to boost growth.

The package, estimated to cost 45 billion pounds (US$50 billion) by the financial year 2026/27, was the largest at a single event since 1972, according to the Institute for Fiscal Studies, a think tank.

Income tax cuts, a drop in property taxes, tax-free shopping for overseas visitors and the scrapping of a planned corporation tax rise are all aimed by the government at giving households and businesses a boost.

To fund the cuts, plus a multi-billion pound scheme to subsidise energy bills, the government’s debt management arm said it would raise its borrowing plan for the current financial year by around 45 per cent to 234 billion pounds.

The bond market went into a tailspin, with yields on the five-year gilt – one of the most sensitive to any near-term shift in interest rate or borrowing expectations – up by half a percentage point. This was the biggest one-day rise since at least late 1991, according to Refinitiv data.

“This huge fiscal event is a radical economic gamble; a ‘Go big or go home’ gamble that will put UK debt on an unstable footing,” said Bethany Payne, global bond portfolio manager, Janus Henderson Investors.

“We had been concerned over the ability of the Bank of England to sustainably sell gilts through the quantitative tightening due to start on Oct 3, but today we are asking whether quantitative tightening is over before it even began.”

Bond holders were already rattled by inflation and by the prospect of more interest rate hikes from the Bank of England (BoE), which on Thursday raised rates by a half-point to 2.25 per cent.

This is “fiscal stimulus at a time when the Bank of England is already worried about aggregate demand being too high, and it’s highly likely to force the Bank of England to raise rates even more than we thought they were going to otherwise”, said David Page, AXA Investment Management head of macro research.

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