Jeremy Hunt hit the TV and radio studios yesterday like a whirlwind. Hours into his new job as chancellor, his task was to calm the financial markets, which had so brutally moved against his predecessor and triggered surging borrowing costs for homeowners.
But has he done enough? Can his words calm turbulent gilt yields when trading opens on Monday morning?
The risk is that markets will be hugely volatile on what will be the first time in two weeks that the Bank of England is not standing behind gilts, or government bonds, ready to buy them to ease pressure on pension funds.
Hunt’s media appearances were seen as an attempt to address the problems Kwarteng had created with the unfunded tax cuts in his mini budget.
Acknowledging that mortgage rates have already rocketed — to as high as 7 per cent, according to some estimates — Hunt pledged credible tax and spending policies. “No chancellor can control the markets or should ever seek to do so. But the thing that is within your power is to demonstrate certainty in public finances,” he told the BBC.
Rupert Harrison, an adviser to George Osborne when he was chancellor and now at BlackRock, said Hunt’s comments were a “turning point”. “Markets now have someone in the Treasury who gets it and who they can trust,” he said.
There has been an unprecedented sell-off of gilts in the past two weeks amid fears that the tax cuts proposed by Kwarteng would fuel inflation and force the Bank of England to raise interest rates. Markets are pricing in a rise of a full percentage point from the Bank next month to take the base rate to 3.25 per cent.
Even after Kwarteng’s replacement by Hunt on Friday afternoon, bond markets kept selling. Some analysts have suggested they will keep attacking until Truss resigns.
Economist Julian Jessop, who has been advising the Truss camp, said Hunt’s pledge of fiscal discipline meant “Trussonomics” had been junked.
“The whole point about Trussonomics was growing the economy … not about a combination of tax cuts and big cuts in spending [the traditional approach]”.
Jessop has previously said that Kwarteng’s mini budget went too far in announcing tax cuts, as this had spooked the markets.
Hunt attempted to show yesterday that he would start work on plans to balance the books ahead of the budget planned for October 31. Unlike with the mini budget, the Office for Budget Responsibility will publish economic forecasts to accompany the government’s fiscal plans.
He acknowledged to the BBC that two mistakes had been made by Kwarteng: abolishing the 45 per cent top rate of income tax; and the decision to “fly blind” without the OBR forecasts. On Friday, Truss also ditched plans to reverse a rise in corporation tax from 19 per cent to 25 per cent. That will raise £18 billion.
Hunt also warned about “difficult decisions” on spending and taxes. “We’re going to ask all government departments to find efficiencies,” he said. “But we’re also going to have pressure on the tax side — taxes are not going to come down by as much as people hoped, and some taxes will have to go up.”
George Buckley, economist at Nomura, said more detail was still needed. The reversal of the corporation tax move, he argued , “goes only a portion of the way”.
Business leaders, as well as the financial markets, were watching Hunt’s performances closely.
Dominic Blakemore, chief executive of FTSE 100 catering giant Compass, said the events of the past few days had been “pretty shocking”. “Throughout, we’ve needed robust, fully costed plans, because markets just can’t operate without that and in a vacuum,” he explained.
Phil Urban, chief executive of FTSE 250 pub chain Mitchells & Butlers, called the situation “ shambolic”. “Business is probably realising that it can’t rely on government or politics to sort things out. So we’re just focusing on what is in our gift to do,” said Urban.
One FTSE 100 boss, who did not want to be identified, resorted to expletives to describe his frustration. Describing Truss and Kwarteng as “goons”, he added: “Every single household is spending most of their time trying to balance their books, and our f***ing prime minister and chancellor don’t have to? Are you f***ing taking the piss?”
His view was that Truss also had to go, to restore credibility. And that may be what the markets start to demand when trading resumes on Monday.
Jessop said: “I don’t think Hunt did anything that would upset the markets or surprise them. But markets don’t like uncertainty. Uncertainty about economic policy — that’s maybe eased a little bit. But now we’ve got an increase in political uncertainty as we can’t be sure who the prime minister is going to be next weekend.”
Paul Jones
