LONDON (Reuters) -The pound gained on Monday on news Britain would reverse plans to cut the highest rate of income tax, one contentious part of a package of financial measures that last month sent sterling and British government bonds into meltdown.
Yields on British government bonds fell, pushing their prices up. The government’s ‘mini-budget’ on Sept. 23 had triggered a rout in the bond market, forcing the Bank of England to step in last week. The FTSE 100 opened lower in line with broader European equities. [GB/]
“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country,” finance minister Kwasi Kwarteng said in a statement.
The U-turn comes after the government’s fiscal plans triggered a crisis of investor confidence, jolting markets to such an extent that the BoE had to intervene with a 65 billion pound bond-buying programme.
The pound gained as much as 1% to $1.128 on initial media reports of the U-turn, the currency’s highest level since the day before Kwarteng announced the “growth plan” that cut taxes and regulation, funded by vast government borrowing.
Sterling later pared some of its gains and was last up 0.6% at $1.12305. The pound had slumped to a record low versus the dollar last week in the days after the mini-budget of $1.03270.
The euro was down 0.3% against the pound at 87.610 pence.
Analysts said the move – which reverses 2 billion out of 45 billion pounds of planned tax cuts – would support the pound, but warned further government action may be needed.
“This probably won’t be enough on its own to restore confidence – whether that’s reversing more tax cuts or plans to reduce spending. Markets will still want their pound of flesh,” said Lee Hardman, currency analyst at MUFG.
Jan von Gerich, chief analyst at Nordea, said it would probably take markets time to “buy the message” but that it was a step in the right direction.
“Questions still remain and sterling will likely remain under pressure,” he added.
(Reporting by Alun John and Iain Withers, editing by Ed Osmond, Kirsten Donovan)
