UK borrowing costs drop as Kwarteng hints at mini budget U-turn

UK borrowing costs collapsed today driven by chancellor Kwasi Kwarteng sending the strongest signal yet he will roll back elements of last month’s mini budget.

Rates on UK gilts dropped across the curve after they yesterday climbed to their highest level since the day the Bank was forced to step in.

Yields on the 30-year gilt, which has suffered the worst of the recent market upheaval, dipped over 40 basis points to below five per cent.

Asked by The Telegraph at the IMF meetings in Washington if he will U-turn on reversing the six percentage point corporation tax hike, he said “let’s see”.

Markets have roiled by prime minister Liz Truss and Kwarteng’s £43bn worth of tax cuts and a short-term borrowing splurge to pay for the £2,500 typical energy bill freeze in last month’s mini budget.

Rates on 10-year gilt, the benchmark for borrowing costs in Britain, fell around 20 basis points, while 2-year gilt yields also fell.

Yields and prices move inversely.

The strengthened over two per cent against the US dollar at one point today. 

Yield on 30-year UK gilt

Analysts at investment bank Nomura said yesterday they expect sterling to fall below parity with the greenback this year.

Investors are bracing for the Bank to pull its support for the UK gilt market tomorrow. Experts have warned there could be a cliff edge that triggers a flare up of volatility.

Yesterday, the Bank purchased over £2bn of bonds, accepting every sell offer on the table.

Governor Andrew Bailey this week told pension funds who have been grappling with margin calls on liability driven investment funds from creditors that they have to “get this done” before the end of the Bank’s support.

Tensions between the government and the Bank that have been bubbling since prime minister Liz Truss hinted she would review the monetary authority’s mandate during the Tory leadership contest resurfaced again yesterday.

Chancellor Kwasi Kwarteng said any volatility that emerges tomorrow when the Bank’s scheme ends will be a “matter for the governor”.

“This is extremely unhelpful and points to the fiscal and monetary sides being at odds with each other,” Neil Wilson, chief market analyst for Finalto, said.

Truss and Kwarteng have insisted the sudden bond sell off and sharp fall in the value of the pound has been driven by international factors such as the Russia-Ukraine war and the US Federal Reserve hiking rates quicker than the Bank.

While certainly a contributing factor, Bank officials have recently sent veiled rebuffs against those claims.

Huw Pill, Threadneedle Street’s chief economist, said yesterday: “The volatile market dynamics that followed the announcement of the growth plan [on 23 September] underline the need to bolster the credibility of the wider institutional framework, in line with my earlier remarks.”

Business secretary Jacob Rees-Mogg last night on ITV’s Peston show criticised the Office for Budget Responsibility (OBR) record in accurately forecasting the trajectory of the UK economy.

Analysts have argued the government’s decision to launch £43bn worth of tax cuts and ramp up borrowing at the mini budget without an OBR assessment fuelled the recent market volatility.