# Britain’s political and market turmoil
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-17
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: UK Finance Minister Jeremy Hunt U-turns on Energy Subsidy
Meta Description: Jeremy Hunt scraps Liz Truss's mini-budget, boosting investor confidence. Hunt's new policies lead to rallies in bonds, currency, and shares.
URL: https://financedigest.com/britains-political-and-market-turmoilhtml

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LONDON (Reuters) – New finance minister Jeremy Hunt scrapped Prime Minister Liz Truss’s Sept. 23 mini-budget and scaled back her vast energy subsidy plan on Monday, seeking to stem a dramatic loss of confidence among investors.

British government bonds, currency and shares rallied after Hunt outlined the historic policy U-turn.

He [later said the government would take decisions of “eye-watering” difficulty to ensure trust and confidence are restored in the country’s finances](https://www.financedigest.com/rapidly-evolving-buy-now-pay-later-finance-drives-retail-growth.html "Rapidly evolving buy now pay later finance drives retail growth").

Truss had already fired her [finance minister](https://www.financedigest.com/scottish-finance-minister-kate-forbes-to-run-for-countrys-leadership.html "Scottish finance minister Kate Forbes to run for country’s leadership") and close ally Kwasi Kwarteng and scrapped parts of their growth plan on Friday in a desperate bid to save her premiership, which is still less than six weeks old.

After Truss did not appear in parliament to answer a question about Kwarteng’s sacking, the opposition Labour Party said she was “scared of her own shadow”.

Following is a snapshot of related events, comments and explanations:

KEY PARTS OF [HUNT’S STATEMENT](https://www.financedigest.com/uk-finance-minister-hunt-to-make-statement-at-1000-gmt-source.html "UK finance minister Hunt to make statement at 1000 GMT – source")

\\* “We will reverse almost all the [tax measures announced in the Growth Plan](https://www.financedigest.com/uk-drops-plan-to-tax-sovereign-wealth-funds.html "UK drops plan to tax sovereign wealth funds") three weeks ago that had not started parliamentary legislation,” Hunt said.

\\* “Taken together with the decision not to cut corporation [tax and restoring the top rate of income tax the measures I’ve announced today will raise every year around 32 billion](https://www.financedigest.com/walmart-paid-most-of-1-billion-tax-for-phonepe-shifting-base-to-india.html "Walmart paid most of billion tax for PhonePe shifting base to India") pounds.

\\* “I’ve decided that the basic [rate of income tax will remain at 20% and it will do so indefinitely until economic circumstances allow for it to be cut.”](https://www.financedigest.com/ecb-raises-interest-rates-again-cuts-bank-subsidies.html "ECB raises interest rates again, cuts bank subsidies")

\\* “I’m announcing today a Treasury-led review into how we [support energy bills](https://www.financedigest.com/energy-bill-support-pushes-uk-budget-deficit-to-february-record.html "Energy bill support pushes UK budget deficit to February record") beyond April next year. The objective is to design a new approach that will cost the taxpayer significantly less than planned, whilst ensuring enough [support for those in need.”](https://www.financedigest.com/britains-digital-banks-need-support-amid-banking-turmoil-trade-body.html "Britain’s digital banks need support amid banking turmoil – trade body")

MARKET REACTION

\\* Gilt yields tumbled, with two- and five-year yields hitting their [lowest since](https://www.financedigest.com/uk-mortgage-approvals-hit-lowest-since-june-2020.html "UK mortgage approvals hit lowest since June 2020") Sept. 23 and long-dated [yields down more than 40 basis points](https://www.financedigest.com/traders-ramp-up-bets-on-75-basis-point-ecb-sept-hike-bond-yields-jump.html "Traders ramp up bets on 75 basis-point ECB Sept hike, bond yields jump"). But [yields remain higher](https://www.financedigest.com/yields-rise-stocks-nudge-higher-after-u-s-jobs-data.html "Yields rise, stocks nudge higher after U.S. jobs data") than before the mini-budget.

\\* The pound was last at $1.1437, its [highest since](https://www.financedigest.com/russian-inflation-accelerates-to-7-61-m-m-in-march-highest-since-1999.html "Russian inflation accelerates to 7.61% m/m in March, highest since 1999") Oct. 5, up 2.3% – its biggest one-day [gain since](https://www.financedigest.com/dollar-heads-for-first-weekly-gain-since-february.html "Dollar heads for first weekly gain since February") March 2020. It [hit its strongest against the euro since early](https://www.financedigest.com/uk-inflation-to-hit-18-in-early-2023-citi-forecasts.html "UK inflation to hit 18% in early 2023, Citi forecasts") September.

\\* [Britain’s main share](https://www.financedigest.com/britain-chips-away-at-natwest-stake-with-1-6-billion-share-sale.html "Britain chips away at NatWest stake with .6 billion share sale") benchmark, the FTSE 100, was up 0.9%.

\\* [Money markets](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") see a 76% chance the BoE will raise interest rates by 75 basis points when it meets on Nov. 3, down from closer to 100 [basis points](https://www.financedigest.com/ecb-goes-big-with-50-basis-point-hike-ending-negative-rates-era.html "ECB goes big with 50 basis-point hike, ending negative rates era") a couple of weeks ago.

\\* Goldman Sachs warned of a deeper recession in Britain next [year](https://www.financedigest.com/2043-the-year-britain-will-turn-cashless.html "2043: The year Britain will turn cashless") while Morgan Stanley said Britain’s mortgage market faces significant stress as households struggle to meet the surging cost of home loans.

WHAT’S BEHIND THE CRISIS?

\\* The Bank of England was [forced into emergency bond-buying to stem a sharp sell-off in Britain’s](https://www.financedigest.com/britain-says-it-is-committed-to-leading-a-nato-task-force-in-2024.html "Britain says it is committed to leading a NATO task force in 2024") 2.1 trillion pound ($2.3 trillion) government bond market that threatened to wreak havoc in the pension industry and increase recession risks.

\\* The sell-off began after Kwarteng’s tax-cut announcement on Sept. 23.

\\* After firing Kwarteng, a close friend and ally, Truss announced that [corporation tax](https://www.financedigest.com/becoming-data-ready-for-mtd-for-corporation-tax-aligning-vat-and-ct.html "Becoming data-ready for MTD for Corporation Tax: aligning VAT and CT") would rise to 25% as intended by her predecessor Boris Johnson, reversing her earlier plan to freeze it at 19%. Kwarteng’s [cut to the highest rate](https://www.financedigest.com/testing-waters-hungarys-central-bank-flags-cut-in-top-end-of-rate-corridor.html "Testing waters, Hungary’s central bank flags cut in top end of rate corridor") of income tax had already been reversed.

\\* The BoE interventions have highlighted a growing segment of Britain’s pensions [sector – liability-driven investment](https://www.financedigest.com/invest-in-infrastructure-to-escape-the-starvation-cycle-warns-leading-nonprofit-sector-strategist.html "Invest In Infrastructure To Escape The ‘Starvation Cycle’, Warns Leading Nonprofit Sector Strategist").

\\* LDI helps pension funds use derivatives to “match” [assets and liabilities to avert risks](https://www.financedigest.com/analysis-watch-out-risk-assets-the-rout-in-bonds-is-coming-your-way.html "Analysis-Watch out risk assets, the rout in bonds is coming your way") of shortfalls in payouts, but the soaring interest rates have triggered emergency collateral calls for those funds to cover the derivatives.

(Graphic: UK government [bond yields surge](https://www.financedigest.com/analysis-banks-lag-bond-yield-surge-as-recession-worries-trump-cheap-valuations.html "Analysis-Banks lag bond yield surge as recession worries trump cheap valuations"), https://graphics.reuters.com/GLOBAL-THEMES/lbvgnqdxapq/chart.png)

![](https://onlineworldnews.com/wp-content/uploads/2022/10/330.jpg)

(Compiled by Toby Chopra, Catherine Evans and Alex Richardson)


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