Asset Intelligence Short update: Pound panic dies down
By Kel Nwanuforo
Britain’s financial markets have witnessed considerable volatility since Chancellor Kwasi Kwarteng presented his ‘mini Budget’ last month. The pound dropped to all-time lows versus the US dollar and government borrowing costs rose sharply, with investors and traders questioning whether Dr Kwarteng’s package of tax cuts was sustainable or responsible.
Although the damage done to the mortgage market largely remains, a number of actions by policymakers appear to have steadied the ship.
The Bank of England stepped in to buy government bonds to restore the stability of that market. Further, the government has now promised that the Chancellor will outline a plan to keep debt under control “shortly” – as opposed to the original date of 23 November – and that this will be published along with economic forecasts from the independent Office for Budget Responsibility.
Truss and Kwarteng have also rowed back on their commitment to abolish the 45p rate of income tax for high earners, a policy arguably disliked by the markets as it was so unpopular with voters.
These moves appear to have regained some measure of market confidence, for now at least, with Sterling touching its highest levels in around two weeks at the time of writing. What is certain is that the government’s next moves will continue to be watched closely by market participants. What is not is whether the Truss administration ever recovers its reputation with voters.
Outside of the UK, financial markets remain under pressure from high inflation, rising interest rates, geopolitical tensions and fears over energy supplies. These are legitimate concerns and they may well continue to cause volatility, as they have done throughout 2022 so far.
However, we are always mindful that the historical record shows that equity markets overall tend to rise over time. While there will inevitably be some bumps along the way, our view is that staying the course and staying invested usually provides the best outcomes in the end. Over the course of more than fifteen decades, global markets have seen World Wars, pandemics, political chaos, financial crises and more – and most have trended upward through it all.