Interest rates - impact of 45% u turn

MK62

BTW, while politically significant, my own view is that economically, ditching the 45p rate cut is less so.....I don't really expect it to directly make much difference to interest rates, but indirectly it might help a little bit in restoring investor confidence, and I think it will help to restore at least some of the large amount of political credibility they had lost with the UK electorate since Sept 23rd..

JohnWinder

Impact? To leave me scratching my head about who are the adults in the room when it comes to economic management.

daveyjp

The removal of the banking bonus cap is still there in the shadows, especially if as expected there may be no inflationary increase to public spending, universal credit and other benefits.

The word is "optics" and first term red wall MPs will expect more changes.  I suspect not many MPs in Lancashire, Yorkshire etc will simply now nod through fracking.

kuratowski

I have some difficulty reconciling the severity of the market reaction with the contents of the "mini budget".  So, I have no idea whether cancelling the abolition of additional rate band is going to have any meaningful economic effect or not.  I do suspect not, as in general, confidence is a lot harder to recover than it is to lose.

Malthusian

Frequentlyhere said:

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.

Thanks to Mr Rules conceding the argument over whether we should spank the national credit card, the only debate left is about tinkering at the margins.

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.

Only if Tory backbenchers decide to march on Truss' office on behalf of lifelong Labour voters.
If Truss can't get the backbenchers to vote through cuts to welfare, what's the alternative? The 1922 committee brings down her government, forces the party faithful to vote correctly this time and install Crisis Sunak, who then... sticks to his "austerity forever" platform and cuts the welfare budget even more?

daveyjp

The reaction was because the effects of the announcment hadn't been stress tested or costed with the OBR input.

The market then very quickly realised that the tax cut was being paid for by borrowing a load of money.

The 45p would have cost £2bn, but don't be distracted by that.  It is now £43bn rather than £45bn borrowed to pay for tax cuts.

NedS

Malthusian said:

Frequentlyhere said:

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.

Only if Tory backbenchers decide to march on Truss' office on behalf of lifelong Labour voters.
If Truss can't get the backbenchers to vote through cuts to welfare, what's the alternative? The 1922 committee brings down her government, forces the party faithful to vote correctly this time and install Crisis Sunak, who then... sticks to his "austerity forever" platform and cuts the welfare budget even more?

I think cutting benefits (or rather not uprating in line with inflation) was not a viable option at the same time as abolishing the 45% tax rate, but now that U-turn has been done, welfare cuts are quite possibly back on the table and not as unpalatable to MPs.

fourmarks

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! 

When Truss was confirmed as PM the French papers, comparing her to Thatcher, dubbed her The Iron Weathervane. I doubt even they expected such immediate confirmation.

Desk

Report here suggests that the markets are now pricing in a 5.5% to 5.75% peak for the base rate, down slightly from 6%.

https://news.sky.com/story/uk-economy-live-news-pound-recovers-12615118

I don't think this u-turn in itself changes very much, but it's a question of what might follow. Difficult to see Truss abandoning the general 'borrow to cut taxes' approach which will help fuel inflation and therefore the base rate response entirely, because it's what her entire premiership is founded upon.

My question is when we can expect the top-paying fixed rates to change again, and by how much?  Looks like we're stuck at about 4% for one year at present. May not change much until the Bank of England's Monetary Policy Committee meets again on November 3, but what will they put the base rate up by? 1%? 1.5%? Expectations are for a big jump, and I'm not sure the BoE can afford to disappoint, given how fragile the markets are.

Not sure when or if we can expect a 4.5% one year fix, or even 5%? And if the Russian offensive in Ukraine collapses entirely, does that change the outlook further?

Desk

coastline

daveyjp said:

The reaction was because the effects of the announcment hadn't been stress tested or costed with the OBR input.

The market then very quickly realised that the tax cut was being paid for by borrowing a load of money.

The 45p would have cost £2bn, but don't be distracted by that.  It is now £43bn rather than £45bn borrowed to pay for tax cuts.

I'd lift the personal tax allowance and not the new19p tax rate. Even pensioners would have benefited from that especially those with a second pension. When state pension is lifted soon there'll be around £2 grand left in the allowance. Not much then and remember it's frozen until 2026 atm.
Regarding plans I wonder how the markets would have reacted to the Labour plan ? When questioned they weren't against much of the £40bn cuts. Yesterday the said a windfall tax on companies would have brought in £10bn. Would the markets be happy with the 6 monthly review they hinted at. Energy scheme is estimated anywhere north of £50bn.
FED in the US have a target rate of near 5% so the UK won't be that far away from that.

FdmcbRmXkAsf9SF (900×563) (twimg.com)

United States Government Bond 10Y - 2022 Data - 1912-2021 Historical - 2023 Forecast (tradingeconomics.com)

United Kingdom Government Bond 10Y - 2022 Data - 1980-2021 Historical - 2023 Forecast (tradingeconomics.com)