Here’s our not-so-mini guide to what’s been happening with the economy since the not-so-mini budget announced by Kwasi Kwarteng on Friday.
He come like the Bank of England launched a temporary bond-buying program as part of the emergency response to prevent a “significant risk” to the financial stability of the United Kingdom.
What did the Chancellor announce?
The biggest tax cuts in 50 years, with a cut in stamp duty, a National Insurance hike scrapped and a planned corporate tax hike suspended, and there was help from several billion pounds for households and businesses on energy bills.
There was also a reduction in the basic rate of forward income tax by one year until April 2023 – then the rabbit out of the hat, the top tax rate of 45 pence dropped, which benefits those earning over £150,000.
All of this to be paid for with additional government borrowing.
What was his idea?
These measures, along with reducing bureaucracy on planning laws, adding bureaucracy to make industrial action more difficult and dropping the EU cap on bankers’ bonuses, are designed to spur a growth of 2.5% in the medium term.
It has been labeled ‘Trussonomics’ but this type of policy is better known as ‘trickle down economics’, the idea being that if the rich and wealthy are taxed less they will invest more in the UK and, squarely, the money will go to low-income people.
The tax cuts will therefore pay for themselves, the theory goes.
Tax cuts? I like the sound of that – why was the reaction so bad?
At Mr Kwarteng the announcement was not called a budget because it is only a budget if the Office for Budget Responsibility provides accompanying costs and forecasts.
It is this lack of detail that has spooked the markets.
It is also believed that the Chancellor’s measures could drive up already runaway inflation (the rate at which prices are rising, currently hovering around 9.9%) at a time when the Bank of England is trying to bring it down ( by raising interest rates).
So the pound fell – what does that mean?
When the foreign exchange markets lose confidence in a country, the value of that country’s currency begins to fall.
Friday’s falls continued on Monday – with the value of the pound falling from $1.12 to a record low of $1.03. It has now stabilized at around $1.06.
Ok, what does this mean for me?
A weaker pound means price rises for UK consumers buying foreign goods – that’s pretty much everyone else.
The UK imports over 50% of its food – so the cost of coffee, bananas, pasta and everything else could rise.
Fuel could also go up, as the price of gas is in dollars.
A weak pound also means the money won’t travel as far if you’re traveling to the United States or countries that use the US dollar.
Why would interest rate hikes be necessary?
When inflation rises, as many economists believe after Friday’s mini-budget, monetary bodies raise interest rates so people spend and borrow less — in theory, dampening inflation.
Will interest rates go up again?
They currently stand at 2.25% after rising steadily from 0.1% at the end of last year.
They were still likely to rise again at the next biannual meeting of the Bank of England’s Monetary Policy Committee (MPC) on November 3 – but there has been speculation that an emergency hike could occur before this date.
The bank said it was monitoring the situation, and its chief economist said yesterday that “significant” intervention would be needed to stabilize the economy.
On Monday, Bloomberg raised its maximum interest rate forecast to 6% for next year – and some forecasts are now higher than that.
This would increase average mortgage repayments by 50% over current rates.
Why are mortgage products being withdrawn and why are banks already raising rates?
This is because mortgages are long-term loans and banks set their rates based on changes in interest rates.
Nationally, Halifax and Santander are just some of the banks to withdraw deals or raise rates – and in the 24 hours since Wednesday the UK has seen its biggest drop ever the number of mortgage products available.
Read more:
The Bank of England’s response is almost unthinkable
Five reasons why the fall of the pound matters
What’s all this about gilts/bonds?
A government bond, also known as a gilt, is a type of debt-based investment, where you lend money to the government in exchange for an agreed interest rate.
Bonds are used to raise funds, which in turn can be spent on new projects or infrastructure by the government.
The Bank of England has now launched a temporary bond-buying program as it takes emergency action to prevent a “significant risk” to the UK’s financial stability.
He is trying to stabilize the economy and, more specifically, to prevent a pension fund crisis.
What happens next?
A lot has changed in the past few days, and you would need a crystal ball to answer this question.
Much depends on how the markets continue to react, whether Tory MPs get restless or the new government changes course, and whether the Bank of England succeeds in stabilizing the economy.
Some dates for the agenda are Nov. 3, when the MPC meets to decide on another interest rate hike, and Nov. 23, when Kwasi Kwarteng promised more details on his economic plan.
Whether he can wait that long is up for debate.
For all the latest updates on the economy and the cost of living crisis, you can follow our blog here.
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