Liz Truss clashes with BBC host over mini-budget
UK’s blue-chip shares plunged this morning after Prime Minister Liz Truss defiant remarks over her Chancellor’s mini-budget further unnerved investors but has since recovered as the pound stabilises and gilt yields fall back. The FTSE 100 dropped as much as 2.2 percent to a fresh six-month low before recovering somewhat later in the morning, while the more domestically oriented FTSE 250 shed 1.4 percent by 7.19am GMT.
As the Prime Minister defended her mini-budget the yield on the UK 10-year gilt, which regulate how much it costs the Government to borrow, rose as much as 21 basis points to 4.22 percent, undoing some of the rally the Bank of England provided yesterday by its emergency action.
The Bank said it would buy gilts – essentially the same as printing money – by up to £65 billion in the coming weeks.
Meanwhile, Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said housebuilders remain under pressure as expectations of sharply higher mortgage rates will hit the property market.
She said: “The febrile mood in the markets has been pacified a little by the Bank of England’s intervention to buy large chunks of UK government debt.”
Ms Streeter said the crisis is far from over as investors adopt a “wait-and-see strategy”.
She added: “They are still highly concerned about the knock on effects of the government’s deep tax cutting policy.”
The FTSE 100 has plunged
Liz Truss and Kwasi Kwarteng have been attacked for their mini-budget
Government borrowing costs are still more than double what they were two months ago and the pound is languishing at 37-year lows.
This will push up inflation as more expensive imports will be passed onto consumers, Ms Streeter added.
She said: “Markets are pricing in interest rates hitting 5.75 percent by next year, a hugely painful shift for homeowners.”
Ms Truss this morning insisted the Government’s tax-cutting measures were the “right plan” in the face of rising energy bills and to get the economy growing despite market turmoil sparked by the Chancellor’s mini-budget.
In her first public comments since the mini-budget market chaos, Ms Truss defended Chancellor Kwasi Kwarteng’s measures, insisting “urgent action” was needed, although she admitted the Government’s decisions have been “controversial”.
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The UK 10-year gilt rose as much as 21 basis points to 4.22 percent
Defiant Liz Truss comes out fighting to defend economic chaos: ‘We had to act urgently’
The PM insisted the Government’s tax-slashing measures were the “right plan” following days of market turmoil in the wake of the mini-budget.
The Prime Minister told BBC Radio Leeds: “We had to take urgent action to get our economy growing, get Britain moving and also deal with inflation.
“Of course, that means taking controversial and difficult decisions but I am prepared to do that as Prime Minister because what is important to me is that we get our economy moving, we make sure that people are able to get through this winter and we are prepared to do what it takes to make that happen.”
Ms Truss faced public questioning about her economic plans for the first time following the fallout from the mini-budget as she toured regional BBC radio stations in a morning round of interviews.
Asked if he had a message for the financial markets as he prepared to visit a
local business in Darlington, Mr Kwarteng said they were “sticking” to the plan.
He said: “”Absolutely. We are sticking to the growth plan and we are going to help people
with energy bills. That’s my two top priorities.”
Meanwhile, yields on British government bonds rose on Thursday, after they fell sharply on Wednesday when the Bank of England revived its bond-buying programme to quell a gilts sell-off that threatened pension funds in the country.
Consumer staples stocks weighed on the benchmark FTSE 100 index, with British American Tobacco sliding 2.9percent as it traded without entitlement to its dividend payout.
Banking stocks dropped 2 percent in early trading.
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Miners declined 2.0 percent as copper prices struggled due to concerns of potential shortages from lower inventories.
Mr Kwarteng sparked turmoil in financial markets last Friday when he delivered a plan to cut taxes without detailing the impact on the public finances or how the government would reform the economy to spur growth.
The pound sank and British government bond yields soared, forcing the Bank of England to revive its bond-buying programme in an emergency move on Wednesday to shore up pension funds.
The Bank’s extraordinary intervention effectively saw it bail out the Government and came amid echoes of the 2008 financial crisis.
It stepped in as the market woes forced pension funds to sell UK government bonds to head off worries over their solvency, which threatened to see them suffer severe losses.
It came after the value of some long-dated bonds had halved in value in recent days.
The gilts sell-off eased after the emergency action, while the pound has also steadied since Monday’s record plunge – standing at 1.08 US dollars thanks in part to the Bank’s move to signal that “significant” interest rate hikes may be on the way to calm sterling and tame inflation.
But there are fears the pound may yet be heading towards parity with the dollar, with the Chancellor not planning to give more details on how tax cuts will be funded until his November fiscal event.
Although she admitted the Government’s decisions have been “controversial”, the PM said she would not reverse the budget.
Asked by BBC Radio Kent if she will reverse the policies unveiled in the mini-budget, Prime Minister Liz Truss replied: “I don’t accept the premise of the question.
“The action we’ve taken has been helping people with their fuel bills, that will start off this weekend… people are going to pay less national insurance, but we are facing difficult economic times. I don’t deny this.
“This is a global problem.
“But what is absolutely right is the UK Government has stepped in and acted at this difficult time.”
But Labour’s shadow shadow chancellor Rachel Reeves said Ms Truss’s interview had made the “disastrous situation even worse”‘ as she called for Parliament to be recalled to reverse the “kamikaze budget”.
Liz Truss and Kwasi Kwarteng’s mini budget has sparked financial chaos
Responding to Ms Truss’s local radio round on Thursday morning, Ms Reeves said: “The Prime Minister’s interviews this morning have made this disastrous situation even worse. Her failure to answer questions about what will happen with people’s pensions and mortgages will leave families across the country facing huge worry.
“It is disgraceful that the family finances of people across the country are being put on the line simply so the Government can give huge unfunded tax cuts to the richest companies and those earning hundreds of thousands of pounds a year.”
She added: “This is a serious situation made in Downing Street and is the direct result of the Conservative Government’s reckless actions.
“If the Prime Minister continues to prioritise saving her face over saving people’s homes, Tory MPs must join Labour in calling for Parliament to be recalled so this kamikaze budget can be reversed.
“Failure to do so will make them complicit in this reckless bout of economic self-harm.”
Senior market analyst Craig Erlam lamented Ms Truss for “ignoring” the UK markets as he accused the Truss government of “willingly” and “completely ignoring extreme market reactions”.
Liz Truss is under mounting pressure
Shadow Treasury chief secretary Pat McFadden repeated Labour’s call for Mr Kwarteng to rethink his economic growth plan.
He told BBC News: “What is more important here? The Chancellor and the Prime Minister saving face or saving the mortgage payments of millions of people across the country?
“This is going to have a real and damaging impact where payments could go up hundreds or thousands of pounds a year. They have got to reconsider this.”
It comes as banks and building societies withdrew more than 3,000 mortgage products as the financial crisis intensifies.
More than 20 providers have withdrawn their entire fixed-rate mortgage range, as rocketing interest rates make them impossible to price, according to business information service Defaqto.
Mortgage rates are rising across the board as markets anticipate that the Bank of England will have to increase base rates from today’s 2.25 per cent to as high as six percent over the next few months.
Interest rates on mortgages still on the market are increasing “at a rapid pace” said Defaqto’s consumer banking expert Katie Brain.
She said: “Lenders seem to be really unsure of what to offer and what price with so many changes in the money markets at the moment.”