Bonds fell and the pound slid to a new 37-year low as market players in the UK were skeptical of the Bank of England’s (BOE) rapidly rising inflation target amid expectations for more fiscal stimulus.
LARGEST INCREASE SINCE 1992
After British Finance Minister Kwasi Kwarteng outlined the government’s plans to stimulate the economy with tax cuts and spending, the 5-year bond yield rose 51 basis points to 4.07 percent, the biggest increase since 1992 when data was held. The pound also fell more than 2% against the dollar, hitting its lowest level since 1985.
“The combination of rising bond yields and falling sterling is a very worrying combination because it indicates that markets are priced at a risk premium for the UK,” said Mike Riddell, Portfolio Manager at Allianz Global Investors. “This is a clear sign that the UK’s credibility in fighting inflation is at stake.” used the phrases.
On the other hand, market actors are investing in the need for policy makers to tighten their monetary policy much more aggressively, by strengthening their positions on BOE rate hikes. Accordingly, the expectation for an interest rate hike, which was 75 basis points in November before Kwarteng’s speech, is priced as 80 percent probability that it will be increased by 100 basis points after the speech.
Liz Truss’ government prepared Britain’s most radical tax cut package since 1972, reducing both workers’ wages and corporate taxes. But strategists worry this will put further pressure on currency and bonds as the growing debt pile makes the UK more dependent on foreign capital flows to finance its deficit.