Pound Sterling Rally Accelerates on Fresh Measures to Steady UK Finances

Above: File image of Chancellor Jeremy Hunt. Image: Gov.UK.

The British Pound extended gains on Monday after the UK government ripped up all its plans to cut taxes and said its energy bill support programme would now end in April.

The moves form part of new Chancellor Jeremy Hunt's plans to restore market confidence in the UK's finances.

The reversal of tax cuts would deliver an additional £32BN to Treasury coffers per year, Hunt said in a televised statement.

Hunt also said the Treasury would embark on a review of how best to protect businesses and households from rising gas and electricity prices.

The current Energy Price Guarantee that caps energy bills - the new government's largest spending commitment - will now end in April.

The programme was opened-ended in nature when announced, making it difficult for markets to price the outlook for the UK's finances.

"The review and potential reform of the Energy Price Guarantee will likely mean that public finances are unlikely to be fully exposed to changes in natural gas prices which are denominated in US Dollars and are volatile which makes them difficult to forecast. Making this liability smaller and more predictive, for example by skewing the support towards those less well-off, makes sense, especially if accompanied by future demand management measures," says Barret Kupelian, senior economist at PwC.

By limiting the programme markets will have greater certainty on how the country's liabilities will evolve.

For markets the message from the government is clear: it is singularly focused on restoring credibility.

The Pound to Dollar exchange rate is now higher a percent on the day at 1.1284, taking bank payment rates to approximately 1.1060 and specialist payment rates to approximately 1.1250.

The Pound to Euro exchange rate is now higher by 0.60% on the day at 1.1560, taking bank payment rates to approximately 1.1333 and payment specialist rates to approximately 1.1530.

Looking at the all-important bond markets - where the government raises debt to pay for spending - yields on all tenors are lower.

This is particularly reassuring given the Bank of England has ended its temporary programme of supporting government long-term bonds.

There could however be limits to Sterling's rally as markets now factor in lower growth and higher inflation, as a result of the government ending its energy support package early.

On current gas market trends, households and businesses would see bills rise again in April, pushing up inflation and further constraining growth.

But gas prices have been falling for weeks now and current trends suggest they are set to fall to levels that make the cost of the Energy Price Guarantee cost natural.

According to NatWest Markets, should the December 2022 forward gas contract fall to 300p/therm the programme is cost neutral.

It has fallen to 390p/therm today. Therefore, much depends on how much further the trends in gas markets extend.

What Hunt Announced

Two policies were maintained (with economists saying this was simply because the legislative process to deliver them was so advanced):

• The National Insurance increase will be reversed, as planned, at a cost of £17BN/annum.
• Stamp Duty cut remains, estimated to account for a smaller £1.5BN

The Chancellor said his tax reversals will raise revenues by £32BN/annum, these include:

• 1p cut in income tax (to raise £6BN)
• Dividend tax
• changes to IR 35
• VAT-free shopping proposal
• off-payroll work proposals

This is in addition to the first u-turn on the 45p tax band abolishment and Friday's reversal of 2023's planned corporation tax hike.