In Britain, another day of judgment in the financial markets draws closer.
Monday morning will bring the first opportunity for investors to give their verdict on the government’s rapidly changing plans for the nation’s public finances. And crucially, it will be the first trading session since the central bank ended a program that spent billions of pounds supporting the bond market through recent turbulence.
Over the weekend, Britain’s new top finance official, Jeremy Hunt, sought to reassure markets, the public and fellow members of the Conservative Party that he can restore the government’s fiscal credibility. Andrew Bailey, the governor of the Bank of England, signaled some renewed confidence in the new chancellor of the Exchequer, Mr. Hunt, saying on Saturday that they had talked and had a “meeting of minds” on fiscal sustainability.
On Friday, Prime Minister Liz Truss sought to end three weeks of financial turmoil precipitated by a bold plan, announced on Sept. 23, to cut taxes by tens of billions of pounds and significantly increase borrowing. Condemnation of this fiscal agenda, coming at a time of high inflation and rising interest rates, was swift: The pound plunged to a record low against the dollar and bond yields rose sharply, upending the Britain’s home mortgage market and causing a crisis in pension funds that led to the central bank’s intervention.
“We need to act now to reassure the markets of our fiscal discipline,” Ms. Truss said on Friday as she sacked Kwasi Kwarteng, the chancellor and close ally who delivered the plan. She also did a U-turn on a second major tax policy. Ms. Truss said she would drop plans to prevent a planned increase in the corporation tax rate, having already scrapped a plan to abolish the income tax rate for the highest earners.
Still, late on Friday the pound fell and government bond yields — a measure of government borrowing costs — rose. The yield on 30-year bonds closed on Friday at 4.78 percent, a full percentage point higher than it was before the Sept. 23 announcement.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Will these trends continue on Monday? When markets open, it will be the first time in two and a half weeks that the central bank hasn’t been buying some government bonds to help ease a liquidity crunch faced by pension funds. The bank bought more than 19 billion pounds of bonds.
How the market reacts will be both a test of the government’s efforts to restore calm and the central bank’s efforts to return order to the bond market. There could be volatility, but the question is whether it’s so extensive that there is a return to the dysfunction that threatened financial stability before.
Over the weekend, there were signs that Mr. Hunt, who is the fourth chancellor in as many months, would be willing to drop much of Ms. Truss’s previous fiscal plan, as he said he was not “taking anything off the table.”
A report in The Sunday Times said that Mr. Hunt would delay for a year a plan to cut the lowest income tax rate.
“We are going to have to take some very difficult decisions both on spending and on tax,” Mr. Hunt said in a BBC interview, which was recorded on Saturday and aired on Sunday morning.
“Spending is not going to increase by as much as people hoped,” he added. “Taxes are not going to go down as quickly as people thought and some taxes are going to go up.”
These plans to lower Britain’s debt levels and have the policies fully assessed by the Office for Budget Responsibility, an independent government watchdog, have apparently been well received by the Bank of England. On Saturday, Mr. Bailey indicated that things at the Treasury are different now.
“It’s a clear message for everybody, including a clear message from markets,” he said at a conference in Washington. “I can tell you there is a very clear and immediate meeting of minds on the importance of stability and sustainability.”
Despite these reassuring words, there is still plenty of uncertainty for investors. It’s unclear how much longer Ms. Truss can hold onto her position as prime minister; Mr. Hunt’s plans for taxes, spending and debt reduction won’t be revealed until Oct. 31; and Britain still faces a series of economic challenges, including high inflation and energy prices, squeezed households and companies warning about a slowdown in consumer spending. There is also the question of how much the functioning of the bond market has improved.
Monday will only bring some answers to these questions.
