Kwexit and U-turns leave consumers spinning

Many will be keeping their eyes peeled be on mortgage market, says interactive investor’s Myron Jobson.

Commenting on news of Kwasi Kwarteng’s ‘kwexit’ as chancellor, and Truss U-turns, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “HMS Britain is up a creek with the captain seemingly hoping to manoeuvre out of the predicament through a series of U-turns, with the chancellor thrown overboard to lighten the load.

“After the Bank of England helped steady the ship through its bond-buying programme, news of a U-turn on parts of the tax-cutting economic strategy announced in the mini-budget has sent the price of UK bonds climbing.

“As the business models lenders use to price mortgages are tied to gilt yields, mortgage holders and those seeking to secure a home loan will hope for a return to competitive mortgage deals after mortgages rates spiked by between one and two percentage points in the fallout of the ‘fiscal event’. However, the mortgage marketplace remains precarious for buyers. Mortgage rates are changing on a daily basis so it’s important for buyers and those seeking to remortgage to keep calm and assess their options.

“It is hard to maintain a financial footing when there is so much up in the air. A decision still needs to be made about uprating benefits in line with inflation, as the nation’s most vulnerable consumers fight a losing battle against rising prices. And what of the 1p cut in the basic income rate tax? The measure was billed to put tax pounds back into consumers’ pockets to help weather the cost-of-living storm - but will the measure survive the swinging axe at Number 10?

“The nation has strayed further into choppy uncharted waters. What the change of tack means for personal finances is unclear. Hope for the best but prepare for the worst is a good mentality to have during these uncertain times. As such, people should consider what steps they can take to shore up their financial position amid the uncertainty. A good rule of thumb is to have three months’ worth of salary stashed away to ensure you can stay financially afloat in a disaster if at all possible, but this is easier said than done.”

Victoria Scholar, Head of Investment at interactive investor, adds: “HMS Britain has lost another lieutenant as it awaits its fourth chancellor in four months. The captain of the ship is looking wobbly too as she puts on her lifejacket and hopes to steady her ship soon.

“In a shock turn of events, prime minister Liz Truss is attempting to restore credibility in her administration by firing the Chancellor of the Exchequer Kwasi Kwarteng amid the market mayhem that has played out since the announcement of his ill-fated mini-budget, forcing emergency intervention from the Bank of England. The government has carried out a series of embarrassing U-turns, bringing forward the date of Kwarteng’s medium-term fiscal plan, abandoning plans to scrap the top 45% rate of income tax and now there are expectations that the government will also U-turn on plans to scrap the increase in corporation tax next April from 19% to 25%.

“Following the ousting of the chancellor, there is now speculation that a group of senior Conservatives could call on Liz Truss to resign next week.

“By letting Kwarteng go, Truss hopes that she can draw a line under the gilt market madness and the plunge in the pound, reinstate investor confidence and prove to the electorate that she is focused on fiscal discipline, rather than unfunded tax cuts.”

“The Monetary Policy Committee (MPC) at the Bank of England has been laser-focused on trying to bring inflation back down towards its 2% target. The chancellor’s mini-budget entirely conflicted with the central bank’s policy of stimulating economic activity with tax cuts, borrowing and spending that would bring about inflationary side-effects. The tug-of-war between fiscal and monetary policy is what spurred the bond market sell-off and general sense of unease across broader financial markets.”

“On top of that, within the Bank of England itself, there have also been policy conflicts with the MPC attempting to rein in inflation, while the Financial Policy Committee (FPC) buys bonds to calm the dysfunctional markets. Again, the MPC is trying to calm economic activity while the FPC had no choice but to carry out a policy similar to the stimulus of quantitative easing to salvage a number of pension funds from the brink of collapse.”

“Equities and bonds are moving higher, while the pound is giving back some of its earlier gains.”