Unless you have somehow managed to avoid the media firestorm that has engulfed the UK over the past few days, you will be unsurprised to hear that there are serious economic problems plaguing the country.
Since Kwasi Kwarteng’s ‘mini budget’ last Friday, there have been multiple developments regarding the already fragile state of the UK’s economy.
Less than 24 hours before Liz Truss’ new government announced the ‘mini budget’ which saw the biggest tax cuts in 50 years, the Bank of England raised interest rates by half a percent in an effort to tackle inflation.
Kwarteng’s budget, where he has seemingly gone all out for economic growth, has now blown a hole in the country’s finances and its credibility with investors.
The pound plummeted to a record low against the US dollar on the Monday following last week’s budget. This came after Kwarteng reaffirmed his intention to gamble with the economy by hinting at more tax cuts to come. Unfortunately, he neglected to explain how these would be funded.
In response, a series of increasingly alarming events occurred:
- Bond prices collapsed
- Borrowing costs soared
- Mayhem was sparked in the mortgage market
- Pension funds were pushed to the brink of insolvency
The UK saw nearly 300 mortgage deals pulled in a single day as the pound nosedived.
HSBC and Santander were the biggest lenders who pulled deals. The Bank of Ireland, Clydesdale Bank, Post Office Money, and building societies including Monmouthshire, were also among those who withdrew products.
There have been reports of lenders who previously offered 4.5% interest now offering 10.5%. Naturally, this has caused panic amongst potential buyers who are currently flooding the banks’ phone lines.
Furthermore, the Bank of England was forced to take emergency action to stop mass insolvencies of pension funds.
The BoE announced it would be carrying out ‘temporary purchases of long-dated UK government bonds’ in response to the pound’s collapse.
What happens now?
The Bank of England’s intervention wherein £65billion will be used to buy government bonds between now and 14th October is designed to protect the economy from the fallout of Truss’ plan.
After this intercession, bond prices recovered sharply, and the pound steadied against the dollar.
However, the pound tumbled by 1% early yesterday. The government bonds were under pressure again, with the yield on 10-year debt climbing to 4.16% and stocks falling by 2%.
Kwarteng and Truss appear to be digging their heels in regarding the planned tax cuts.
To reassure markets they are serious about bringing down Britain’s debt, they are meeting with the Office for Budget Responsibility, the official forecaster.
The chancellor intends to set out a new medium-term fiscal plan on 23rd November, which will explain how he plans to reduce debt by the end of the OBR’s five-year forecasting period.
Truss and Kwarteng have insisted that they will not be u-turning on the tax cuts but many of their fellow Conservatives feel a climbdown is inevitable.
It remains to be seen how the government will deal with the current crisis and if they can get economic matters under control.
In what has already been a turbulent period for the world at large, with the pandemic, war in Ukraine, and soaring inflation and energy rates, the pound taking a nosedive will not only impact the UK, but the entire global economy.
A recession could be looming, and the UK government must act to stabilise the economy.