A turbulent day on the financial markets saw Kwasi Kwarteng sacked after 38 days as Chancellor. Trading in sterling and UK government bonds known as gilts started the day positively on rumours that much of the mini-Budget was going to be scrapped.
The PM confirmed the Government would raise corporation tax on company profits from 19 to 25 per cent in a move worth £18billion to the Exchequer.
Sterling pared back early losses after the Chancellor’s exit was confirmed.
However, the pound fell after the PM’s curt press conference only announced the reversal on corporation tax as the major change to fiscal policy.
Liz Truss reaffirmed plans to outline the Government’s fiscal strategy on October 31, alongside a projection by the Office for Budget Responsibility.
After 3pm on Friday, the pound fell 1.2 per cent to 1.119 against the US dollar.
Danni Hewson, financial analyst at stockbroker AJ Bell, said: “The freeze in corporation tax was the jewel in the crown of the new PM’s plans.
“By allowing companies to keep more of the profits they make, Liz Truss and her former chancellor hoped to lure more foreign investment and to convince UK-based companies to grow right here.”
She said the extra cash from the U-turn “will help to offset the rising cost of borrowing and the energy crisis”.
Ms Hewson added that the move had bolstered sentiment “but the fear is it will not be enough”.
The update also sparked another jump in gilt yields, which rise as bond prices fall. The yield on 30-year government bonds increased by 2.86 per cent, or 0.13 percentage points, to 4.7 per cent, increasing the state’s borrowing costs.
Gilt yields surged to 5.1 per cent after the mini-Budget in September, causing distress for many UK pension funds. The Bank of England stepped in by promising to buy up to £65billion from gilts sellers.
Pressure on gilts returned on Tuesday after traders were spooked by Bank governor Andrew Bailey’s message that the central bank’s bond-buying scheme would not be extended beyond Friday. The Bank bought just £1.5billion yesterday as its intervention ended.
Bethany Payne, a boss at Janus Henderson, said the true test for pension funds “will be on Monday morning to see whether they have done enough”.