Interest rates - impact of 45% u turn

biscan25

Markets are not pricing in a significant change.
But there's bigger things going on globally than the UK political situation, which may be pulling rates upwards.

steampowered

ChilliBob said:

Really does look bad doesn't it though, hardly an image of an iron lady who doesn't change her mind   perhaps she will give more consideration to such big announcements in the future to avoid u turns like this! 

Completely agree.

If you want to be an Iron Lady who is not for turning, you need to be very confident in your policy. That means you need to have conviction; you need to have done the detailed analysis; you need to welcome independent scrutiny; and you need to listen to people who might disagree to ensure you have thought about the problem from all angles. Margaret Thatcher had believed in her policies for decades and was supported by leading academics - she used to carry a copy of Milton Friedman's book in her handbag. 

Making up random policies on the hoof and then refusing to change them is not a sign of strength, its a sign of idiocy.

Refusing to allow the Office of Budgetary Responsibility to analyse your policies is not a sign of strength, its a sign of weakness.

Introducing a completely new major policy (i.e. the cut in the 45% rate) that you did not even mention during the leadership election is not a sign of strength, its a sign of cowardice.

As Michael Gove said, Truss has something of a mandate for reducing corporation tax and national insurance as those policies were covered in her leadership election but she had zero mandate for borrowing yet more money to reduce the top rate of income tax.

Thumbs_Up

£900bn spent on quantitative easing.

£400bn spent  on covid-19.

£50bn   spent on tax give-away now a bit rescinded.

Of note, of those 3 set’s of figures why did the financial markets or the media have a meltdown with the tax give-away?

The chickens want to come home too roost I’ll wager.

Malthusian

I suspect the 45% tax rate will turn out to be Truss' "superfluous duck". Truss' enemies will now crow that she is "in office but not in power", but the reality is that there is little chance of MPs forcing yet another leadership election in an attempt to install Crisis Sunak over the wishes of the party faithful. 
Truss will do penance, she has been made to jettison a policy of near-zero economic significance, she might also have to sack her principal rival for her job, her MPs will preen and talk about the primacy of Parliament, but virtually all of her mini-budget will be implemented. 
She had already won the economic argument when Starmer's response to her mini-budget was that Labour would bring back the 45% rate again and chuck it at the NHS. In other words, that Labour accepted the need for stimulus via borrowing. 

mark_cycling00

Here's some analysis (one viewpoint) from a German Investment bank (written over the weekend I think)

https://www.berenberg.de/uploads/web/Economics/Documents-EN/Macro-Flash/221003-UK-THE-NEAR-TERM-IMPACT-OF-TRUSSONOMICS.pdf

aroominyork

Thumbs_Up said:

£900bn spent on quantitative easing.

£400bn spent  on covid-19.

£50bn   spent on tax give-away now a bit rescinded.

Of note, of those 3 set’s of figures why did the financial markets or the media have a meltdown with the tax give-away?

The chickens want to come home too roost I’ll wager.

Because it demonstrated economic illiteracy and political incompetence.

Thumbs_Up

aroominyork said:

Thumbs_Up said:

£900bn spent on quantitative easing.

£400bn spent  on covid-19.

£50bn   spent on tax give-away now a bit rescinded.

Of note, of those 3 set’s of figures why did the financial markets or the media have a meltdown with the tax give-away?

The chickens want to come home too roost I’ll wager.

Because it demonstrated economic illiteracy and political incompetence.

Oh, a bit like selling the gold off on the cheap, or signing off the two white elephants...

aroominyork

mark_cycling00 said:

Here's some analysis (one viewpoint) from a German Investment bank (written over the weekend I think)

https://www.berenberg.de/uploads/web/Economics/Documents-EN/Macro-Flash/221003-UK-THE-NEAR-TERM-IMPACT-OF-TRUSSONOMICS.pdf

"We now expect the BoE to hike by 100bp in November and by 75bp in December, instead of by 50bp in each meeting." If you agree with that (as I am mulling over...) short-dated bargain gilts would be a better idea that medium-dated.

MK62

There was a rumour over the weekend that the 45p tax rate cut might well be voted down in parliament, and so might be a reason for the U-turn......nothing substantive though.
The IFS estimated the economic cost of the cut to be between nothing and £6bn......the government estimated £2bn.....but this specific policy was never really about economics, it was far more political in nature, and the common view (though not universal) is that it was unfair ......the PM's refusal to commit to index link benefits for the low end of the income scale only made the optics look even worse, and if that becomes policy.....well, you can imagine the fallout from that on it's own - cutting the 45p rate at the same time would look very bad, especially when we are all supposed to be in it together.

Frequentlyhere

That's exactly it @MK62 .

I have to unusually disagree with @Malthusian though, I think this mini-budget controversy is far from over.  They've backed off of the politically most toxic element which only represented £2bn of £40bn they've promised , but must still now demonstrate how they're going to fund the rest of it.

I've already seen rumblings on social media about rebellion over putting real terms cuts on the welfare state. They'll probably still try it on, and be forced to reverse there too.

They've already promised to increase the defence budget. 

Making cuts to the NHS this Winter - good luck with that one.  What else?  Cut the school budget maybe? That'd go down well.

Or perhaps as they're clearly in such a robust political position they feel confident that they'll be able to do what no other Conservative Govt has achieved and make huge planning reforms? (which itself is highly debatable in terms of generating growth anyway). I am struggling to imagine what they are going to be able to cut that is politically viable to be honest.

Sorry a bit off topic - to answer OP's question, I think it will slightly soften the interest rate rise. Gilt yields have already fallen this morning, which is encouraging. The markets can also sense, IMO, that this Government will now be very limited in the damage it can inflict because of its political weakness.   

However, the global financial market does still look pretty rough at present, that could now far outweigh any impact on UK political infighting going forward.