Reactions: UK Truss fires Kwarteng, set to backtrack on tax cuts

LONDON, Oct 14 (Reuters) – British Prime Minister Liz Truss sacked her finance minister Kwasi Kwarteng on Friday, replacing him with former foreign secretary Jeremy Hunt, and scrapped part of her grand plans to cut money. unfunded taxes.

Truss told a news conference Britain would stick to a plan to raise corporation tax and said his government must act now to reassure markets of its fiscal discipline.

The pound fell against the dollar, trading down 1% at $1.1280, near the lows of the day.

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The pound rose to a record high and UK government bonds, or gilts, plummeted after the government released its ‘mini budget’ on September 23.

Prices for two-year gilts, which fell before Truss spoke, fell further late in the session, pushing the yield up 18 basis points to 3.97%, while the blue chip FTSE 100 index (.FTSE) gave up almost all of the day’s gains to close just 0.1% higher.

Below are comments from analysts, investors and politicians.

DANNI HEWSON, FINANCIAL ANALYST, AJ BELL, LONDON:

“As the U-turn is going, it’s a doozy. The corporate tax freeze wasn’t something most households talked about around the dinner table, but it was the crown jewel of the crown of the new Prime Minister’s plans to supercharge Britain’s economic growth.By allowing companies to keep more of the profits they make, Liz Truss and her former Chancellor were banking on this to attract more foreign investment and convince UK-based businesses to expand here.

“This may have temporarily caused businesses to ignore the tangle of bureaucracy and additional costs associated with doing business in a post-Brexit world. But at what cost ? Companies had already factored in the new tax rates which had been well stated and at 25% the UK will still be competitive.”

RICHARD MAGUIRE, HEAD OF PRICING STRATEGY, RABOBANK, LONDON:

“It continues to leave a very big question mark over the viability of her position. I suspect UK assets will continue to remain under pressure until we get another personnel change in the form of Liz Truss herself- same.

I don’t see how this press conference will have done much to enhance UK PLC’s appeal to foreign investors. You see that with the weakness in the pound.

I expect the gilts and the pound to remain under pressure going forward, which leaves the door open to the prospect that at least the Bank of England will eventually be forced to continue its intervention or, at the very least , to push back the prospect of quantitative tightening in the tall grass, is perhaps the most likely outcome.”

SAMMY CHAAR, CHIEF ECONOMIST, LOMBARD ODIER, GENEVA

“Today the main story is that there is going to be a U-turn, and the government recognizes that it needs to change course. Our understanding of the remarks by the BOE and Governor Bailey to the IMF is that they probably weren’t aimed at market players, they were aimed at the UK government itself.

It appears there has been some form of difference of opinion between the two entities, our understanding is that the Bank of England has won the debate, the UK government is about to change course, we don’t know how and what, but it’s pretty clear that we’re going to see something much more reasonable from the UK government.”

BEN LAIDLER, GLOBAL MARKET STRATEGIST, ETORO, LONDON:

“We’ve seen an £18billion tax reversal, but there’s a feeling the horse may have already run off. The costs of the mini-budget horror show have already been high and there’s no It is not clear that the corporate tax reversal will sustainably calm markets.

While anticipation of the latest developments has led to a recent rally in UK bond prices and the pound sterling, the latter two remain weaker than just a few months ago, implying inflation and funding costs important extras for UK businesses and consumers.

It is doubtful that this will be enough to support markets, following the end of the Bank of England’s emergency support for the UK bond market today.”

PAUL DALES, UK CHIEF ECONOMIST, CAPITAL ECONOMICS:

“It is unlikely that the dismissal of Kwasi Kwarteng from the office of Chancellor and the new plans to cancel (!) the rise in corporation tax from 19% to 25% from next April will be enough to them alone to regain the full confidence of the Indeed, after this and the U-turn on the 45p tax cut, there are still £25bn of unfunded tax cuts remaining from the mini budget (compared to £45bn original books).

It is therefore not, for the moment at least, a complete reversal of the mini-budget. It’s more of a mini U-turn.”

THOMAS MCGARRITY, HEAD, EQUITIES, RBC WEALTH MANAGEMENT:

“A significant reversal in unfunded tax plans should support UK domestic equities given their strong underperformance over the past month. This does not, however, change our caution towards UK domestic equities and maintains a strong preference for larger companies. internationally oriented given the challenges the UK economy continues to face.

There are undoubtedly good deals for longer-term investors within the domestic part of the UK stock market, but it is essential to remain selective. Continued weakness in the pound will likely lead to further opportunistic approaches from international businesses and private equity firms to UK-listed companies.”

BRIAN LEVITT, GLOBAL MARKET STRATEGIST FOR INVESCO, NEW YORK

“The policy was viewed poorly by the markets. It was misguided and ill-planned in an inflationary environment. The market believed the policies would exacerbate inflation and the gilt market began to become unbalanced, requiring central bank support While this won’t solve the UK’s inflation and economic challenges, it helps restore some stability to the UK gilt market and eases pressure on the pound.In addition, it reduces the risk of a crash on the UK pensions market. Overall, this is a positive short-term effect for the markets, but again, it does not change the UK’s structural challenges.”

JAMES SMITH, ECONOMIST, ENG

“The key is the magnitude of this U-turn in practice and minus the person in charge. There is a bit of a risk that if we only have a partial U-turn markets will be under pressure again next week. “

KRISHNA GUHA AND PETER WILLIAMS, ANALYSTS, EVERCORE ISI

“It’s the first time in decades – since at least the 1990s – that financial markets have forced the government of a major developed economy with its own central bank to capitulate on its fundamental fiscal ambitions. While the UK situation is idiosyncratic in many ways, we see here a more important lesson for governments and investors around the world: for a period at least, bond market vigils are back. We believe the UK’s example reduces the risk that Italy’s populist new government will take the kind of reckless British-style steps that would put you in the line of fire.”

FORMER UK FINANCE MINISTER PHILIP HAMMOND

“I fear we (the Conservative Party) have wasted years and years of hard work building and maintaining a reputation as a party of fiscal discipline and skill in government.”

SUSANNAH STREETER, SENIOR INVESTMENT AND MARKET ANALYST, HARGREAVES LANSDOWN

“So far the Prime Minister has won a breather, but financial markets are very sensitive and anything less than a cooperative approach with the Bank of England, the Office for Budget Responsibility and international institutions could cause a new instability.”

MUJTABA RAHMAN, GENERAL MANAGER, EUROPE, EURASIA GROUP

“Eurasia Group now assigns a 55% chance that Truss will be ousted before the next election; Tory MPs, including some who backed Truss for the leadership, are already plotting to impeach her, with Christmas their target date.”

ROSS WALKER AND IMOGEN BACHRA, NATWEST MARKETS

“The apparent market and media obsession with fiscal policy misses the point: Most of the fiscal easing over the next two years comes from the energy support package…While energy support costs could possibly be reduced via greater targeting (and the government could but be lucky thanks to falling wholesale prices), there is no political consensus to dismantle this support Therefore, the possibility of a rally in gilts (lower yields) and sterling seems limited.

BENJAMIN NABARRO, ECONOMIST, CITI

“The key short-term problem is the contradiction between monetary and fiscal policy. This is driving up rate expectations, deteriorating fiscal fundamentals. It is also weighing on UK institutional credibility.”

RACHEL REEVES, CFO OF THE OPPOSITION LABOR PARTY

“This humiliating U-turn is necessary – but the real harm has already been done. This is a Tory crisis, made in Downing Street. It will not be forgiven or forgotten.”

NICK MACPHERSON, FORMER SENIOR UNITED KINGDOM TREASURY OFFICIAL

“All credit goes to Bailey de la Banque (Bank of England Governor Andrew Bailey) whose Friday deadline forced the government to adopt a more orthodox economic policy and thus restore order to the markets.”

JAMES ATHEY, INVESTMENT DIRECTOR, ABRDN

“The risk now is that investors forget that there are far more problems than just ill-advised and untimely fiscal easing. current account deficit The housing market is likely to take a hammer blow from soaring mortgage rates and the war in Ukraine is brewing We may be going through the worst of the volatility, but I fear the UK Uni is far from being off the hook.”

CHRIS BEAUCHAMP, CHIEF MARKET ANALYST AT IG GROUP,

“Kwarteng’s removal as Chancellor, making him one of the shortest holders of the post, has done little to boost the pound, given that it already rallied yesterday in hope for a fiscal turnaround Now the market will wait to see what is actually decided, and only then will it consider supporting the government in terms of a further GBPUSD rebound and/or of a decline in gilt yields. Liz Truss is certainly not out of the woods yet.”

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Compiled by William Schomberg, Amanda Cooper, Dhara Ranasinghe, David Milliken, Harry Robertson and Lucy Raitano in London and Alden Bentley in New York; edited by Sarah Young and Alex Richardson, Kirsten Donovan

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