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The 30-year UK government yield decreases, and the pound sterling is getting stronger

17/10/2022


Source: MarketWatch, 17th of October



The new UK chancellor (Jeremy Hunt), has rewritten the government’s tax and spending plans in order to rebuild the government’s fiscal credibility. This includes suppressing parts of Kwasi Kwarteng’s tax cuts and slashing the government’s energy support package. Precisely, Hunt announced the scrapping of £32bn of tax cuts, roughly two-thirds of the £45bn package promised by the government. The market responded positively, and it seems that the market has confidence in Hunt’s capacity to control Britain’s public finances. The 30-year yield trades 0.42 percentage points lower today at 4.36 percent and sterling is at 1.3 percent higher against the dollar at $1.1316.



Source: Xe.com, 17th of October


Obviously, these decisions go against the economic policy promises of prime minister Liz Truss – tax cuts and no spending decrease. In the chancellor’s words, his priority is to restore “economic stability”, which brings the question “what about the promises made to the voters who elected prime minister Truss?”. I think that in such unprecedented times, it is complicated to criticise those decisions. The unfunded tax cuts were a threat to UK’s financial stability. I have posted below a graph from the Wall Street Journal as a reminder that inflation hurts the purchasing power of earnings. In addition, it is also important to keep in mind that it is for the most vulnerable populations that inflation is the most penalising. Financial stability is key to the well-being of populations and I hope that these measures will pave the way for inclusive and sustainable growth.




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