It’s been a nightmare week for UK assets after the government’s so-called mini-budget put the country’s financial credibility in question and sent panic ripping through markets.
But the reaction has been about far more than the turmoil on trading floors that sent sterling plunging and gilt yields soaring to multi-year highs. Consumers, businesses and the financial system have all become tangled up in the shockwaves, so much so that the Bank of England had to stage an emergency intervention at one point.
The government is so far sticking to its plans, and has tried to deflect responsibility for the market fallout. As Prime Minister Liz Truss prepares for the annual conference of her Conservative Party next week, here are some of the numbers that capture the most controversial fiscal policy in years.
How it all started. That £161 billion (R3.3 trillion) is the estimated cost of Chancellor of the Exchequer Kwasi Kwarteng’s so-called mini-budget and bumper tax giveaway announced on September 23. The worrying aspect for investors was the lack of detail on how this was all going to be funded, particularly at a time of rampant inflation and rapidly rising interest rates.
The uncertainty was a hammer blow to UK economic credibility and investors took fright.
Mark Carney, one-time governor of the Bank of England, summed up the issue in simple terms: “We don’t have all the numbers. So, you can’t tell whether or not they add up.”
It didn’t stop on the day one. After Kwarteng promised more tax cuts at the weekend - failing to read the room and provide some reassurance about fiscal responsibility - the pound’s slump continued at the open on Monday.
In the early hours of the UK morning, it dropped to a record low of $1.0350 against the dollar.
While predictions of pound-dollar parity have been floating around for a while (dollar strength is also a big factor here), that view was very much in vogue in the early part of the week. Sterling then recovered to $1.12, and was trading around $1.11 late on Friday. That’s still about 17% down on where it was at the start of the year.
The repercussions for interest rates and bank funding means lenders have been pulling mortgage products from the market in droves, with about 1 690 withdrawn between the mini-budget and Friday, according to data from price comparison website Moneyfacts.
A record number - more than 900 - disappeared on Tuesday alone. Many were fixed-rate deals, which consumers may have been going for to try to lock in some (relative) value before the next round of expected interest-rate increases by the central bank. Some deals will return, but they’ll likely be a lot more expensive when they do.
While the pound has been the center of attention, the real dangers are in the UK government bond market. Prior to the budget announcement, the yield on 10-year UK government debt was less than 4%, but rose to 4.5% at one point this week. The 30-year took an even bigger bruising, reaching 5% for the first since 1998.
Between bonds and stocks, the selloff that took hold meant at one point that more than $500 billion had been wiped off the value of UK assets since Truss became prime minister on Sept. 6.