Sterling and gilts rally as pressure mounts on Liz Truss to ditch tax cuts

Sterling and UK government bonds jumped on Thursday as Liz Truss’s government came under mounting pressure from Tory MPs and the IMF to reverse or alter the unfunded tax cut plans that have shaken markets.

The gains were bolstered by the Bank of England, which continued to ramp up its bond purchases under an emergency intervention due to end on Friday and as the head of the IMF told the UK “not to prolong the pain” of its unfunded tax cuts.

Sterling rose as much as 2.3 per cent against the dollar to $1.136, shrugging off data showing higher-than-expected US inflation. The 30-year gilt yield fell by 0.34 percentage points to 4.55 per cent, signalling a strong rise in prices.

The government’s 30-year borrowing costs had soared above 5 per cent on Wednesday, close to the level that prompted the BoE to step into markets with an offer to buy up to £65bn of long-term gilts two weeks ago.

Pressure from Conservative MPs is increasing on Truss to scrap key elements of the September 23 “mini” Budget, including axing a £17bn corporation tax cut.

One MP said the mood in the party following a backbenchers’ meeting with Truss on Wednesday evening was “horrendous”. Earlier in the day, the prime minister had said she would not be carrying out any spending cuts, raising further questions about how the tax cuts would be financed.

Kristalina Georgieva, the IMF managing director, also reiterated on Thursday the fund’s view that fiscal policy “should not undermine monetary policy.” 

In comments directed at the UK after a meeting with Kwarteng and Bank of England governor Andrew Bailey, she said: “Don’t prolong the pain — make sure that actions are coherent and consistent.”

She added: “If the evidence is that there has to be a recalibration, it is right for governments to do so.”

Overall, the “mini” Budget included £45bn of unfunded tax cuts, although the government has already made a U-turn on £2bn plans to abolish the 45p top rate of personal tax.

“Markets are reacting positively to the possibility of another U-turn on the Budget,” said Athanasios Vamvakidis, a currency strategist at Bank of America. “It would show that market discipline worked and finally the government got the message.”

Investors had previously been unnerved by confirmation from Bailey on Tuesday that the BoE’s bond-buying programme would not be extended beyond Friday, with the Bank warning troubled pension schemes that they had just three days left to sell whatever assets they needed to in order to restore their cash buffers.

However, after the central bank purchased £4.4bn of bonds on Wednesday — easily the biggest daily volume so far in the BoE’s programme — markets were reassured by signs that pension funds were taking advantage of the facility to offload gilts and raise cash. The BoE then bought £4.7bn of gilts on Thursday, including of £3.1bn of index-linked bonds.

The increased rate of purchases “shows that people are realising they had better use the facility quick because the window is closing,” said James Athey, a fund manager at Abrdn. “It also seems like the kind of levels we hit yesterday are a line in the sand where the bank is prepared to provide liquidity.”

Shorter-dated bonds also rallied, with the 10-year gilt yield down 0.24 percentage points at 4.19 per cent.

Despite Wednesday’s declines, 30-year bond yields remain well above the level of around 3.8 per cent seen before the “mini” Budget triggered acute volatility in the gilt market and sterling.