After facing an unprecedented slump in recent weeks, the British pound is registering a new lease of life, thanks to the much-anticipated change of course from new finance minister Jeremy Hunt. Sterling is up 0.8 percent at $1.1259, extending its gains ahead of the announcement scheduled for 11 a.m. local time today.
The market’s reaction to the change in finance minister was also evident in the performance of British government bonds, also known as Gilts. With yields moving inversely to prices, 10-year gilt yields fell 30 basis points to 4.029% on Monday morning, while 5-year and 2-year gilt yields fell to 4.013% and 3.663% respectively.
The British economy was thrown off balance when former finance minister Kwasi Kwarteng announced a large tax cut with no corresponding revenue stream to cushion the cuts and help support the economy. UK markets were unprepared for such revenue streams to be removed and stakeholders revolted, resulting in a systemic plunge in stock prices and indices.
Although the Bank of England (BoE) did its best to help support the market, there was no sign of cooling, forcing the government to take a more aggressive approach to calm the market. When the pressure was too great, Prime Minister Liz Truss had to fire Kwasi Kwarteng and the newly appointed Jeremy Hunt believes that some of the measures were taken too quickly and too soon and that there is a need to backtrack.
While Jeremy Hunt said he will focus on growth, he added that growth will not be compromised in any way by stability.
“The desire to grow the economy is right – it means more people can get good jobs, new businesses can thrive, and we can guarantee world-class public services. But we’ve gone too far, too fast“, said Jeremy Hunt in a statement released on Saturday.
Making the right decision to support the pound
As soon as the first tax plans were unveiled, many industrial and political leaders around the world knew that this was a basis for destabilizing the markets.
One world leader who expressed pessimism about the Kwarteng tax cuts was U.S. President Joe Biden. In addition to calling the tax cut plans a “mistake” and expressing how other countries’ economies can affect the U.S., President Biden reaffirmed that there would never be interference and that the path forward in the short term would depend on Britain.
“I wasn’t the only one who thought it was a mistake“, said Joe Biden. “I don’t agree with the policy, but that’s for Britain to decide“.
The International Monetary Fund (IMF) was also against the government’s previous position, and with the change of course, many expect that more than the pound will benefit in the long run.