Kwarteng tries to calm investors but UK bonds sell off again

A man crosses Waterloo Bridge during the evening rush-hour with skyscrapers of the City of London financial district seen behind in London, Britain, Oct. 10, 2022. REUTERS/Toby Melville

LONDON  – British finance minister Kwasi Kwarteng, who last month sparked a bond market rout with unfunded tax cuts, sought to reassure investors on Monday by bringing forward a budget announcement and naming a Treasury insider to run the department.

But a selloff of British government debt sped up again — even after the Bank of England announced more support for the fragile market — on worries about the scale of borrowing planned by Kwarteng and Prime Minister Liz Truss.

Under pressure to rebuild investor confidence, Kwarteng said he would reveal longer-term tax and spending plans and independent economic forecasts on Oct. 31, more than three weeks earlier than previously scheduled.

He also announced that experienced Treasury official James Bowler would be the finance ministry’s new top civil servant, after unsettling investors by abruptly ousting his predecessor, Tom Scholar.

Newspapers reported last week that Truss had wanted to give the job to an outsider, having accused the Treasury of following low-growth economic policy “orthodoxy”.

Mel Stride, a lawmaker who chairs the Treasury Committee in the lower house of parliament and had criticised Scholar’s departure, said the appointment would help reassure investors.

But investors remained anxious, pushing up the yields on longer-term British government debt closer towards their peaks of late September when pension funds came under strain, despite the Bank of England enlarging its emergency market support which is due to expire on Friday.

“The market reaction so far has been far from encouraging and are a sign of how precarious the situation may still be,” said Daniela Russell, head of UK rates strategy at HSBC.

The Financial Conduct Authority, a regulator, told trading platforms they must tell it immediately about any big deterioration in market conditions, while the European Union’s securities watchdog asked Britain about the extreme moves.

The earlier date of Kwarteng’s budget announcement will allow the BoE to factor the government’s tax and spending plans into its thinking before it announces its next interest rate decision on Nov. 3.

Many investors think the BoE could raise rates by a whole percentage point to counter the inflationary impact of Kwarteng’s tax cuts.

It is also due to start its quantitative tightening (QT) sales of British government bonds on Oct. 31 after postponing it because of its emergency bond purchase move.

“You have lots of risk events coming,” Pooja Kumra, senior European rates strategist at TD Securities, said. “The end of temporary purchases, then the fiscal outlook on Oct. 31 and the start of QT, and the BoE meeting itself on Nov. 3.”

HSBC’s Russell said the BoE might have to give longer-term support to the market and restructure its bond sale plans to focus on shorter-term debt, with Britain’s debt office possibly also skewing its bond sales away from longer maturities.

New budget, same growth problems?

Kwarteng is preparing to head to Washington this week with International Monetary Fund criticisms of Britain’s new policy direction ringing in his ears.

He said the new date for his medium-term fiscal statement would give the independent Office For Budget Responsibility (OBR) enough time to carry out a full forecast.

Kwarteng has previously said the OBR would not have had enough time to produce satisfactory projections for his Sept. 23 announcement, although the OBR has contradicted this.

Kwarteng and Truss are hoping that the OBR will back their claims that tax cuts and reforms to areas such as planning rules and immigration will boost Britain’s economic growth prospects.

But last month the IMF said the government’s push for economic growth and the BoE’s attempts to control inflation were working against each other.

The new date for the fiscal plan sets the clock ticking for Kwarteng and Truss to settle divisions among ministers over their programme.

Having bowed to pressure to drop the most divisive policy – eliminating the 45% top rate of income tax for the highest earners – they face opposition in the cabinet to the idea of cutting welfare benefits in inflation-adjusted terms.

Last week two senior ministers expressed their dissatisfaction with Truss’s income tax U-turn.

($1 = 0.9038 pound)