The growth plan outlined by the chancellor to pull Britain out of the depths of a cost-of-living crisis and back to prosperity was met with consternation in financial markets, with the pound suffering a particular fall at the end of the day.

The value of sterling, bonds and shares fell sharply after Kwasi Kwarteng’s stock mini budget.

The chancellor has unveiled the biggest tax cut for 50 years as part of a new economic package – a package that will be paid for by a huge jump in government borrowing.

The plans, which include previously announced help with energy bills for households and businesses, boost the Treasury’s plans to issue debt for the current financial year alone by £72.4bn to £234.1bn.

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Other measures included scrapping the top rate of income tax of 45% and cutting the basic rate by 1p from April.

In aggregate, it went much further than markets expected.

The pound – which has already fallen this month due to a strong dollar – fell below $1.09 for the first time in 37 years.

It was down more than 3 cents on the day.

This came after US bank Citi said on Friday afternoon that the currency faced the prospect of a crisis of confidence.

He added that it could eventually reach parity with the dollar for the first time in history, but expected sterling to settle in the $1.05-$1.10 range.

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The all-time low of $1.0545 was recorded on February 25, 1985.

Yields on UK government bonds, known as gilts, jumped on the prospect of a big spike in government borrowing.

Investors unloaded short-term bonds as fast as they could, with five-year borrowings posting their biggest one-day gain since 1991 as they demanded higher rates for what they saw as extra risk.

The FTSE 100 traded more than 2% lower, with miners and energy stocks the worst gainers.

Commenting on the package, Caroline Le Jeune, head of tax at accountants Blick Rothenberg, said: “In 25 years of analyzing budgets, this is probably the most dramatic, risky and unreasonable mini-budget.

“Truss and her new government are taking a big risk.”

This is partly because government stimulus tends to be inflationary because it increases demand.

The Bank of England, meanwhile, is trying to fight inflation.

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The pound has hit a 40-year low

Markets have priced the Bank rate above 5% next year as a result of the growth plan, suggesting that the Bank will have to raise rates directly in response.

Trevor Gritham, head of asset management at Royal London Asset Management, said: “We are likely to see a tug of war reminiscent of the 1970s.

“Investors should be prepared for a rough ride,” he concluded.

https://news.sky.com/story/mini-budget-pound-and-bonds-slump-as-investors-take-fright-over-borrowing-spree-12704010

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