45% tax U-turn: Pound bounces despite Kwarteng reputation hit

The pound enjoyed a welcome bounce after Kwasi Kwarteng manoeuvred his first U-turn as Chancellor by scrapping the proposed cut to the 45% tax rate, with sterling jumping from $1.1088 to $1.12646 in less than two hours.

Russ Mould, investment director at AJ Bell, said:  “The U-turn is important for two reasons. First, the market was panicking about the cost of the tax cuts and how that would push up Government debt and in turn raise the prospect of reduced public spending and benefit cuts.

“Removing one of the key components of this seemingly flawed plan provided some relief, and you saw that in how the pound rallied and 10-year gilt rates briefly fell below 4%.

“The other factor to consider is that Kwarteng has effectively admitted to a massive policy error only weeks into his tenure as Chancellor. If Liz Truss is to establish any credibility as Prime Minister, can she afford to have anyone on her team who has effectively scored an own goal in the opening game?

“The fact that both the pound fell back and gilt rates started to move higher after the news had been digested is the market’s way of saying there are still plenty of problems with the Government’s finances, state of the consumer and business, and economic outlook. With or without the 45% tax cut, the country still faces challenging times with individuals and companies finding life a lot harder.

“The FTSE 100 fell 1% to 6,827, dragged down by miners, financial services and consumer goods specialists. Many of these earn in dollars and so a stronger pound – if even if it just a temporary move – is bad for them.

“The FTSE 250 fared even worse, falling 1.1% to 16,983, with travel companies, tech and Asian-related investment trusts among the worst performers. Most of those will be linked to gloomier global economic activity rather than simply what’s happening in the UK.”