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Will the protagonist of the sequel to Zhuohuisi's "tax cut disaster" be the Bank of England?

2022-10-13T11:04:12.078Z


Prime Minister Liz Truss insisted on his £43 billion investment in the second "Prime Minister's Questions and Answers" after taking office this week after a two-week recess of the party convention.


Prime Minister Liz Truss insisted on his £43bn debt reduction in his second "Prime Minister's Questions and Answers" after taking office this week after a two-week recess of the party convention. tax route, and indicated that it would not cut government spending.

Despite constant pressure from the Conservative Party to further reduce the size of the "small budget" tax cuts, Zhuo Huisi still showed a firm stance at the moment.


This "mini-budget" was announced on September 23 before the adjournment by the current Chancellor of the Exchequer, Kwasi Kwarteng, who co-authored the book "Britannica Unchained" with Zhuo Huisi. The belief in tax and regulation reduction to promote economic growth can be regarded as the first step in "unshackled" for the UK after the new government came to power.

It proposes Britain's largest tax cut in half a century, bucking the Bank of England's just raising interest rates in an attempt to tame inflation, and backing tax cuts not even the business community is asking for with a deficit budget.

The market was shocked by this. The British pound fell to an all-time low of 1.035 against the US dollar. The price of long-term British government bonds fell sharply, and the bond interest rate rose sharply, which attracted criticism from experts including the International Monetary Fund (IMF).

The crisis of pension funds

Although the exchange rate of the pound recovered quickly, the British government bond market remained extremely volatile.

The problem arises particularly from UK pension funds.

UK pension funds generally use a liability-driven investment strategy. In order to ensure that their investments can have sufficient income to pay the fixed pension expenditure, they often use various derivative investment tools to hedge interest rate risk. When rates fall, funds make money, and when rates rise, they need to put up more money as collateral for it.

On October 3, Finance-related Hao Ting spoke at the Conservative Party Conference.

(AP)

As UK government bond yields soar, pension funds need to hand over more money as collateral in a short period of time.

To make up for this, pension funds with insufficient liquidity on hand can only quickly sell the most liquid asset other than cash, namely British government bonds.

When the outside world is already selling British government bonds, the sale of government bonds by pension funds will further reduce the price of bonds, which is to push up the interest rate of government bonds. Forced to sell more Treasuries - thus creating a vicious circle.

In the midst of the crisis, the Bank of England decided to enter the market for 13 working days on September 28, temporarily reversing its tightening policy, and set a daily bond purchase scale of 5 billion pounds of long-term government bonds, and later increased the bond purchase scale to daily. £10bn, and expanded to inflation-linked national debt.

On the day the policy was introduced, the UK 10-year and 30-year government bond yields fell sharply by 0.5 and 1 percentage points respectively.

Under pressure from inside and outside the party, Zhuo Huisi finally decided to make a slight concession on his tax reduction policy on October 3, and withdraw the plan worth 2 billion pounds to remove the top income tax rate ladder.

On the other hand, Guan Haoting also advanced his financial plan, which was originally scheduled to be announced on November 23, to October 31. At that time, the government's policy of reducing debt over several years will be announced, and the Office of Budget Responsibility (OBR) will announce its financial plan. Prediction of the impact of "small budget".

Mortgage rates have also risen sharply after UK government bond yields have risen sharply.

In the case of high energy expenditure and persistent inflation, this will increase the expenditure burden of many Britons.

(AP)

Financial void that cannot be filled

However, people do not see how the Zhuohuisi government can reduce the government's debt.

Rumors had earlier suggested that Zhuohuisi was considering changing the increase in government benefits to wage growth rather than inflation, but the proposal was quickly rejected by a crowd of Conservative MPs.

There is also a saying that Guan Haoting is planning to open the 5 billion pounds of foreign aid to the indifference of the British, but this is far from filling the financial hole caused by Zhuo Huisi's tax cuts, and it is expected to attract opposition from members of the party who are concerned about Britain's international status.

At a time when the Conservatives are lagging behind Labour by nearly 30 percentage points and dissatisfaction with Zhuohuisi as high as 60%, the Conservatives have no political space to significantly cut government spending.

Meanwhile, the IMF's latest estimates point to the UK's economic growth rate of only 0.3% in the coming year (which does not include a "mini-budget"), far short of the 2.5% growth target of the Zhuohuisi authorities in the longer term.

Therefore, using economic growth to offset the size of the national debt is probably not a credible way out.

The only solution seems to be Zhuo Huisi, who bows his head and admits his mistake, and substantially withdraws the small-budget tax cut policy.

Bank of England exterior.

(AP)

Bank of England in trouble

While Zhuohuisi insisted on not admitting wrongdoing, the market's dissatisfaction with Britain's failure to rule and expectations of economic instability appear to have been reflected in its rebound in government bond yields.

From September 28 to October 12, in the context of the central bank's continued commitment to buy bonds, the interest rates on the UK's 10-year and 30-year government bonds rose by 0.4 and 0.9 percentage points respectively.

Under these circumstances, the Bank of England has entered the eye of the crisis.

On the one hand, the Bank of England has already embarked on the path of tightening monetary policy and suppressing inflation at a time when inflation in the United Kingdom is high.

Therefore, after this emergency bond purchase, the Bank of England has decided to return to tightening, in order to maintain the outside world's confidence in suppressing inflation, so as to avoid the risk of inflation expectations pushing up inflation.

The Governor of the Bank of England, Andrew Bailey, three days before the expiration of the bond purchase commitment on the 14th (11th), firmly warned the market that "there are only three days left" and "you must get this done" (You've got to get this done).

But at the same time, since the instability of the bond market still exists, people are doubting whether the central bank will not switch to the market anyway after the bond purchase commitment expires on the 14th.

Some bankers even told the media that some central bankers told them that Bailey's "dead line" on the 14th could still be moved, which caused confusion in public relations.

At this point, the Bank of England may find itself in a difficult situation amid the market turmoil of a "small budget".

If after the 14th, the national debt market fails to stabilize, the debt interest rate rises again, the pension fund is under pressure to sell long-term national debt again, and the same vicious circle comes again, should the central bank re-enter the market and launch it again? A round of emergency bond purchases?

If the central bank turns its back, its credibility will be lost, and it will be difficult to rely on the "export technique" that does not need to pay the cost to influence the market in the future; and when the central bank once again "temporarily" changes from tightening to water release under the influence of the government's fiscal policy, inflation in the UK The problem is more difficult to solve.

However, in the vicious cycle that pension funds are constantly being forced to sell bonds, drive down bond prices, and push up bond interest rates, the central bank really has to intervene.

To solve the problem for the central bank, the best way is still to go back to the basics, let Zhuo Huisi admit his mistakes and withdraw the policy, and abandon the ideology of "reducing tax to meet all changes", so as to restore people's confidence in the UK's fiscal governance and remove the market Motivation for the sell-off of UK government bonds.

However, Zhuo Huisi, who came to power on the basis of the ideology that he thought was Thatcherism, probably won't take this step until he is forced into the palace.

Zhuo Huisi, who wanted to untie the shackles of Britain as soon as he came to power, may make Britain fall into another shackle, and one of the victims may be the credibility of the Bank of England.

Britain reiterates that it will not change tax cut plan Zhuo Huisi has become a lame duck everywhere?

The Bank of England finally notified the end of emergency bond purchases three days later, the pound fell below 1.1, and the bond rate soared again

Source: hk1

All news articles on 2022-10-13

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