Tuesday, November 29

Pound falls as experts forecast house price drop of at least 10% next year – business live | Business


Sterling, currently down almost 0.4% at $1.0690 against the dollar, isn’t the only currency to have slumped against the surging US dollar. China’s renminbi has fallen to fresh record lows, since data first became available in 2011.

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The dollar continues to rise in value against other major currencies, after the US central bank hiked interest rates again aggressively earlier this month, and as recession fears spook markets. The greenback is seen as a safer investment in times of trouble.

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Julian Jessop, economics fellow at the Institute of Economic Affairs, a free market thinktank which is highly regarded by Liz Truss, has warned that Britain’s economy could end up in a “doom loop” of falling currency and rising interest rates, but also insisted that recent market moves had been an over reaction. He told radio 4:

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n

It is correct to be concerned about the fall in the pound and the rise in long term interest rates, and there is a risk that we do end up in a doom loop of a falling currency, rising interest rates and weaker growth which obviously would undermine the agenda of the new government.

n

But I also think that people have overreacted in the last few days in particular. If we step back a bit, actually almost all that the new government has done has been very positive and actually the sort of thing I would expect the IMF to welcome.

n

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He pointed to the energy price freeze and the cancellation of tax increases (national insurance and corporation tax), adding:

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n

On top of that is the supply side agenda. The key here is to get productivity up.

n

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Jessop denied that a U-turn on measures like the scrapping of the top 45p income tax rate is a good way to restore confidence.

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n

It’s only a few billion.

n

It’s not obvious to me that a U-turn on something like this would be positive for confidence. There are better ways to restore confidence. The government has made a start there, confirming that there will be another full fiscal statement in November with the OBR forecast that people are looking for.

n

Currency markets at least seem to be settling down. I’m more concerned about the rise in long-term government bond yields than I’m about the pound. The fall in the pound is still primarily more of a dollar story… But the rise in long-term interest rates, if sustained, and I hope and expect it won’t be, that could be far more damaging for the economy because that’s not just the government’s cost of borrowing, it also affects mortgages and corporate debt and everything else as well.

n

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warns of potential ‘doom loop'”,”contributors”:[],”primaryDateLine”:”Wed 28 Sep 2022 10.01 BST”,”secondaryDateLine”:”First published on Wed 28 Sep 2022 07.24 BST”},{“id”:”633405648f084e56bac571ed”,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Ray Dalio, a billionaire veteran investor and founder of Bridgewater, the world’s largest hedge fund, has explained why gilts and sterling have sold off, and expressed concern about the government’s understanding of the situation. He agrees with the IMF that the tax cuts were a mistake, and says that “excessive borrowing” is unsustainable.

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n

The UK is running a large deficit which means it has to sell a lot of bonds and it’s running a current account deficit, which means it has to bring that money from abroad. And when you have more bonds to sell than the market wants to buy there’s a limitation and as a result there is a selloff. And that selloff is both a decline in bonds which raises interest rates and also a decline in sterling. This has been something that has happened a number of times in the UK, at real historic moments, and I would think that there would be an understanding of the mechanics of that by the government and that’s why it’s concerning…

n

I can’t imagine that this is intended and if it’s not intended, then it’s an understanding question.

n

You have to have real interest rates rise, you have to have interest rates rise higher than inflation. Past evaluations such as the 1992 ERM realignment is such that you would know that high enough interest rates don’t rectify the problem. It’s a basic thing. You can’t spend more than you earn without creating debt. And when that debt does not have a high enough return to compensate for inflation you’re going to have this kind of imbalance.

n

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Asked about the government’s planned ‘dash for growth,’ he says:

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n

That doesn’t make any sense. You can’t make wealth by running large deficits, you have to have lenders who want to own the debt and still it becomes a debt that is a burden. It doesn’t stimulate the economy, productivity is what stimulates the economy over the long run.

n

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The IMF says the tax cuts were a mistake, and Dalio agrees.

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n

Yes, it’s a mistake because it’s [sterling] not a major reserve currency and you need foreign money. You can’t do this without its consequences and yes it undermines the desirability of owning that. There’s a big dependence on foreign investment. Think about the losses that have come from the decline of sterling. It produces losses for foreign investors. And so it discourages foreign investors when that foreign investment is needed.

n

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The imbalance could be corrected if “there is enough of a depreciation in the exchange rate and rise in interest rates” but this comes at a cost, he says.

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n

That makes everything very cheap it means imported inflation goes up.

n

It corrects painfully the imbalance that’s produced by excessive borrowing. It’s not sustainable, it doesn’t raise living standards.

n

It leaves scars in the minds of those who invest in the UK.

n

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founder: ‘excessive borrowing not sustainable'”,”contributors”:[],”primaryDateLine”:”Wed 28 Sep 2022 10.01 BST”,”secondaryDateLine”:”First published on Wed 28 Sep 2022 07.24 BST”},{“id”:”6333eece8f08ef7e8107bb20″,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Sir Keir Starmer, the Labour leader, said his own variable rate mortgage has gone up by a few hundred pounds. He told LBC radio this morning:

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n

So many people with mortgages will be really worried by what’s going on because they know what this means for their their budgets – prices are going up.
We all look at the graph and we see the pound falling, but it’s not an abstract graph. This is reflected in people’s mortgages, etc. And people are very, very worried this morning.

n

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He said the government has got to set out “how are they going to fix the problems that they have made”, with the November statement [on 23 November] “far too long off” to review the situation.

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He also said his party was more united and confident than it had been in years and people at the Labour conference in Liverpool “can feel something in the air”.

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n

And what they’re feeling in the air, I think, is change – because obviously, the government we’ve got has made an absolute mess of the economy and here you’ve got a Labour Party calmly, carefully and with confidence, setting out alternative plans for our economy and for our public services.

n

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November statement ‘far too long off’ to review tax cuts”,”contributors”:[],”primaryDateLine”:”Wed 28 Sep 2022 10.01 BST”,”secondaryDateLine”:”First published on Wed 28 Sep 2022 07.24 BST”},{“id”:”6333eccd8f086841b84c373e”,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Ray Boulger, from the mortgage broker John Charcol, has predicted a 10% fall in UK house prices next year, while analysts have warned prices could drop as much as 15%.

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Boulger says the gilt market meltdown, and the risk of interest rates rising to 6% by next summer “makes it very difficult to know where to price mortgage products”. This will undoubtedly have an impact on the housing market. He told BBC radio 4’s Today programme:

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n

We can expect to see a significant fall in house prices, perhaps 10% next year.

n

Whilst at the moment I don’t think we’re going to see many more forced sellers… it’s certainly going to have an effect on people’s ability to buy.

n

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Analysts at Credit Suisse are warning that higher interest rates, rising inflation and the risk of recession could lead to house prices falling by between 10% and 15%. Andrew Wishart, senior property economist at Capital Economics, has also warned of a similar slump.

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n

The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable.

n

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Hundreds of mortgage deals have been pulled by banks and building societies, including HSBC and Santander.

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Kwarteng’s £45bn unfunded tax cuts, which mainly benefit the wealthy, have stoked fears of a borrowing binge and led to a government bond meltdown since Friday. The selloff has pushed up yields – the interest paid on government debt – which move in inverse relationship to prices.

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The yield on the benchmark 10-year gilt, as UK government bonds are known, has retreated slightly but is hovering around 4.39%, up sharply from 3.1% before Friday’s mini-budget.

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Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains:

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n

[Yields] have hit the highest level since the financial crisis in 2008, which is piling pressure on mortgage holders, given gilt yields have an impact on swap rates, which guide lenders’ mortgage offers. Corporate bond yields have shot up even for investment grade companies, considered to be low risk, adding to worries that companies needing to refinance soon or borrow more to cope with rising input costs could struggle to make repayments.

n

“,”elementId”:”fdb1d5c7-43ee-49bc-b729-42bcdf77a1e7″},{“_type”:”model.dotcomrendering.pageElements.RichLinkBlockElement”,”url”:”https://www.theguardian.com/business/2022/sep/27/uk-government-bonds-yields-rising-10-year-gilts”,”text”:”UK government bonds: why are yields rising and why does it matter?”,”prefix”:”Related: “,”role”:”thumbnail”,”elementId”:”b755221a-811b-4eae-adf4-81b595380128″},{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

To finance higher borrowing to pay for the tax cuts, an extra £72.4bn in debt sales are now planned for the current financial year alone. On top of this, the Bank of England plans to sell about £40bn of bonds over the next year to wind down its quantitative easing programme.

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Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

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In a stinging attack, the International Monetary Fund has urged Liz Truss’s government to reconsider its tax-cutting plans to prevent stoking inequality.

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In rare public criticism of a leading global economy, the Washington-based fund said Kwasi Kwarteng’s mini-budget risked undermining the efforts of the Bank of England to tackle rampant inflation amid the cost of living emergency.

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It said a fiscal policy announcement planned by Kwarteng for 23 November presented an “opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners”.

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Keir Starmer, leader of the opposition Labour party, said the IMF’s criticism shows how serious the situation is. He told LBC Radio:

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n

The IMF statement is very serious and it shows just what a mess the government have made of the economy and it’s self-inflicted, this was a step they didn’t have to take.

n

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On the markets, sterling is on the backfoot again, slumping as much as 1% to around $1.06, while the dollar has hit a fresh 20-year high as rising global interest rates stoked recession fears. The pound fell to an all-time low of $1.0327 against the dollar on Monday morning, and had traded around $1.1300 before Friday’s mini-budget.

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Seen as a safe haven, the dollar rose 0.5% against a basket of major currencies to hit a new peak of 114.7 in Asian trade. The yield on benchmark US 10-year government bonds also climbed, to 4% for the first time since 2010, peaking at 4.004%.

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Moh Siong Sim, a currency strategist at Bank of Singapore, told Reuters:

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n

It’s a combination of the spillover from the UK… where the gilt yields have gone ballistic. And that has spilled over into other developed market bond markets, so there’s a bit of a ricochet effect.

n

And of course… this is against the backdrop of a very determined message by the Fed to do whatever it takes to bring inflation down.

n

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The Bank of England is likely to deliver a “significant policy response” to the UK’s tax cuts, its chief economist Huw Pill said on Tuesday afternoon. But Pill also argued that the Bank should wait until its next scheduled meeting in the first week of November (rather than through an emergency rate hike).

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Truss and Kwarteng apparently disagreed over how to deal with the crash in sterling. Downing Street denied that there was a row.

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However, Whitehall sources said there was talk within the civil service of an argument between the prime minister and chancellor at their meeting on Monday morning, and Sky News said Truss had been resisting Kwarteng’s suggestion that a Treasury statement was needed to calm the markets.

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The Agenda

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    n

  • 7.45am BST: France Consumer confidence for September (forecast: 80)

  • n

  • 8.15am BST: ECB president Christine Lagarde speech

  • n

  • 9am BST: Italy business and consumer confidence for September (forecasts: 102.1 / 95.1)

  • n

  • 9.15am BST: Bank of England deputy governor Jon Cunliffe speech

  • n

  • 1.30pm BST: US trade for August

  • n

  • 3pm BST: US Pending home sales for August

  • n

  • 3.15pm BST: US Federal Reserve chair Jay Powell speech

  • n

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Key events

Sterling, currently down almost 0.4% at $1.0690 against the dollar, isn’t the only currency to have slumped against the surging US dollar. China’s renminbi has fallen to fresh record lows, since data first became available in 2011.

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The dollar continues to rise in value against other major currencies, after the US central bank hiked interest rates again aggressively earlier this month, and as recession fears spook markets. The greenback is seen as a safer investment in times of trouble.

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Julian Jessop, economics fellow at the Institute of Economic Affairs, a free market thinktank which is highly regarded by Liz Truss, has warned that Britain’s economy could end up in a “doom loop” of falling currency and rising interest rates, but also insisted that recent market moves had been an over reaction. He told radio 4:

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n

It is correct to be concerned about the fall in the pound and the rise in long term interest rates, and there is a risk that we do end up in a doom loop of a falling currency, rising interest rates and weaker growth which obviously would undermine the agenda of the new government.

n

But I also think that people have overreacted in the last few days in particular. If we step back a bit, actually almost all that the new government has done has been very positive and actually the sort of thing I would expect the IMF to welcome.

n

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He pointed to the energy price freeze and the cancellation of tax increases (national insurance and corporation tax), adding:

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n

On top of that is the supply side agenda. The key here is to get productivity up.

n

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Jessop denied that a U-turn on measures like the scrapping of the top 45p income tax rate is a good way to restore confidence.

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n

It’s only a few billion.

n

It’s not obvious to me that a U-turn on something like this would be positive for confidence. There are better ways to restore confidence. The government has made a start there, confirming that there will be another full fiscal statement in November with the OBR forecast that people are looking for.

n

Currency markets at least seem to be settling down. I’m more concerned about the rise in long-term government bond yields than I’m about the pound. The fall in the pound is still primarily more of a dollar story… But the rise in long-term interest rates, if sustained, and I hope and expect it won’t be, that could be far more damaging for the economy because that’s not just the government’s cost of borrowing, it also affects mortgages and corporate debt and everything else as well.

n

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warns of potential ‘doom loop'”,”contributors”:[],”primaryDateLine”:”Wed 28 Sep 2022 10.01 BST”,”secondaryDateLine”:”First published on Wed 28 Sep 2022 07.24 BST”},{“id”:”633405648f084e56bac571ed”,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Ray Dalio, a billionaire veteran investor and founder of Bridgewater, the world’s largest hedge fund, has explained why gilts and sterling have sold off, and expressed concern about the government’s understanding of the situation. He agrees with the IMF that the tax cuts were a mistake, and says that “excessive borrowing” is unsustainable.

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n

The UK is running a large deficit which means it has to sell a lot of bonds and it’s running a current account deficit, which means it has to bring that money from abroad. And when you have more bonds to sell than the market wants to buy there’s a limitation and as a result there is a selloff. And that selloff is both a decline in bonds which raises interest rates and also a decline in sterling. This has been something that has happened a number of times in the UK, at real historic moments, and I would think that there would be an understanding of the mechanics of that by the government and that’s why it’s concerning…

n

I can’t imagine that this is intended and if it’s not intended, then it’s an understanding question.

n

You have to have real interest rates rise, you have to have interest rates rise higher than inflation. Past evaluations such as the 1992 ERM realignment is such that you would know that high enough interest rates don’t rectify the problem. It’s a basic thing. You can’t spend more than you earn without creating debt. And when that debt does not have a high enough return to compensate for inflation you’re going to have this kind of imbalance.

n

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Asked about the government’s planned ‘dash for growth,’ he says:

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n

That doesn’t make any sense. You can’t make wealth by running large deficits, you have to have lenders who want to own the debt and still it becomes a debt that is a burden. It doesn’t stimulate the economy, productivity is what stimulates the economy over the long run.

n

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The IMF says the tax cuts were a mistake, and Dalio agrees.

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n

Yes, it’s a mistake because it’s [sterling] not a major reserve currency and you need foreign money. You can’t do this without its consequences and yes it undermines the desirability of owning that. There’s a big dependence on foreign investment. Think about the losses that have come from the decline of sterling. It produces losses for foreign investors. And so it discourages foreign investors when that foreign investment is needed.

n

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The imbalance could be corrected if “there is enough of a depreciation in the exchange rate and rise in interest rates” but this comes at a cost, he says.

“,”elementId”:”ce2ccdd5-ef91-4fa1-859a-dac7434d58c0″},{“_type”:”model.dotcomrendering.pageElements.BlockquoteBlockElement”,”html”:”

n

That makes everything very cheap it means imported inflation goes up.

n

It corrects painfully the imbalance that’s produced by excessive borrowing. It’s not sustainable, it doesn’t raise living standards.

n

It leaves scars in the minds of those who invest in the UK.

n

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founder: ‘excessive borrowing not sustainable'”,”contributors”:[],”primaryDateLine”:”Wed 28 Sep 2022 10.01 BST”,”secondaryDateLine”:”First published on Wed 28 Sep 2022 07.24 BST”},{“id”:”6333eece8f08ef7e8107bb20″,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Sir Keir Starmer, the Labour leader, said his own variable rate mortgage has gone up by a few hundred pounds. He told LBC radio this morning:

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n

So many people with mortgages will be really worried by what’s going on because they know what this means for their their budgets – prices are going up.
We all look at the graph and we see the pound falling, but it’s not an abstract graph. This is reflected in people’s mortgages, etc. And people are very, very worried this morning.

n

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He said the government has got to set out “how are they going to fix the problems that they have made”, with the November statement [on 23 November] “far too long off” to review the situation.

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He also said his party was more united and confident than it had been in years and people at the Labour conference in Liverpool “can feel something in the air”.

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n

And what they’re feeling in the air, I think, is change – because obviously, the government we’ve got has made an absolute mess of the economy and here you’ve got a Labour Party calmly, carefully and with confidence, setting out alternative plans for our economy and for our public services.

n

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November statement ‘far too long off’ to review tax cuts”,”contributors”:[],”primaryDateLine”:”Wed 28 Sep 2022 10.01 BST”,”secondaryDateLine”:”First published on Wed 28 Sep 2022 07.24 BST”},{“id”:”6333eccd8f086841b84c373e”,”elements”:[{“_type”:”model.dotcomrendering.pageElements.TextBlockElement”,”html”:”

Ray Boulger, from the mortgage broker John Charcol, has predicted a 10% fall in UK house prices next year, while analysts have warned prices could drop as much as 15%.

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Boulger says the gilt market meltdown, and the risk of interest rates rising to 6% by next summer “makes it very difficult to know where to price mortgage products”. This will undoubtedly have an impact on the housing market. He told BBC radio 4’s Today programme:

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n

We can expect to see a significant fall in house prices, perhaps 10% next year.

n

Whilst at the moment I don’t think we’re going to see many more forced sellers… it’s certainly going to have an effect on people’s ability to buy.

n

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Analysts at Credit Suisse are warning that higher interest rates, rising inflation and the risk of recession could lead to house prices falling by between 10% and 15%. Andrew Wishart, senior property economist at Capital Economics, has also warned of a similar slump.

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n

The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable.

n

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Hundreds of mortgage deals have been pulled by banks and building societies, including HSBC and Santander.

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Kwarteng’s £45bn unfunded tax cuts, which mainly benefit the wealthy, have stoked fears of a borrowing binge and led to a government bond meltdown since Friday. The selloff has pushed up yields – the interest paid on government debt – which move in inverse relationship to prices.

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The yield on the benchmark 10-year gilt, as UK government bonds are known, has retreated slightly but is hovering around 4.39%, up sharply from 3.1% before Friday’s mini-budget.

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Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains:

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n

[Yields] have hit the highest level since the financial crisis in 2008, which is piling pressure on mortgage holders, given gilt yields have an impact on swap rates, which guide lenders’ mortgage offers. Corporate bond yields have shot up even for investment grade companies, considered to be low risk, adding to worries that companies needing to refinance soon or borrow more to cope with rising input costs could struggle to make repayments.

n

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To finance higher borrowing to pay for the tax cuts, an extra £72.4bn in debt sales are now planned for the current financial year alone. On top of this, the Bank of England plans to sell about £40bn of bonds over the next year to wind down its quantitative easing programme.

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Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

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In a stinging attack, the International Monetary Fund has urged Liz Truss’s government to reconsider its tax-cutting plans to prevent stoking inequality.

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In rare public criticism of a leading global economy, the Washington-based fund said Kwasi Kwarteng’s mini-budget risked undermining the efforts of the Bank of England to tackle rampant inflation amid the cost of living emergency.

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It said a fiscal policy announcement planned by Kwarteng for 23 November presented an “opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners”.

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Keir Starmer, leader of the opposition Labour party, said the IMF’s criticism shows how serious the situation is. He told LBC Radio:

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n

The IMF statement is very serious and it shows just what a mess the government have made of the economy and it’s self-inflicted, this was a step they didn’t have to take.

n

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On the markets, sterling is on the backfoot again, slumping as much as 1% to around $1.06, while the dollar has hit a fresh 20-year high as rising global interest rates stoked recession fears. The pound fell to an all-time low of $1.0327 against the dollar on Monday morning, and had traded around $1.1300 before Friday’s mini-budget.

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Seen as a safe haven, the dollar rose 0.5% against a basket of major currencies to hit a new peak of 114.7 in Asian trade. The yield on benchmark US 10-year government bonds also climbed, to 4% for the first time since 2010, peaking at 4.004%.

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Moh Siong Sim, a currency strategist at Bank of Singapore, told Reuters:

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n

It’s a combination of the spillover from the UK… where the gilt yields have gone ballistic. And that has spilled over into other developed market bond markets, so there’s a bit of a ricochet effect.

n

And of course… this is against the backdrop of a very determined message by the Fed to do whatever it takes to bring inflation down.

n

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The Bank of England is likely to deliver a “significant policy response” to the UK’s tax cuts, its chief economist Huw Pill said on Tuesday afternoon. But Pill also argued that the Bank should wait until its next scheduled meeting in the first week of November (rather than through an emergency rate hike).

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Truss and Kwarteng apparently disagreed over how to deal with the crash in sterling. Downing Street denied that there was a row.

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However, Whitehall sources said there was talk within the civil service of an argument between the prime minister and chancellor at their meeting on Monday morning, and Sky News said Truss had been resisting Kwarteng’s suggestion that a Treasury statement was needed to calm the markets.

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The Agenda

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    n

  • 7.45am BST: France Consumer confidence for September (forecast: 80)

  • n

  • 8.15am BST: ECB president Christine Lagarde speech

  • n

  • 9am BST: Italy business and consumer confidence for September (forecasts: 102.1 / 95.1)

  • n

  • 9.15am BST: Bank of England deputy governor Jon Cunliffe speech

  • n

  • 1.30pm BST: US trade for August

  • n

  • 3pm BST: US Pending home sales for August

  • n

  • 3.15pm BST: US Federal Reserve chair Jay Powell speech

  • n

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Filters BETA

China’s reminbi hits record low against dollar

Sterling, currently down almost 0.4% at $1.0690 against the dollar, isn’t the only currency to have slumped against the surging US dollar. China’s renminbi has fallen to fresh record lows, since data first became available in 2011.

The dollar continues to rise in value against other major currencies, after the US central bank hiked interest rates again aggressively earlier this month, and as recession fears spook markets. The greenback is seen as a safer investment in times of trouble.

Economist warns of potential ‘doom loop’

Julian Jessop, economics fellow at the Institute of Economic Affairs, a free market thinktank which is highly regarded by Liz Truss, has warned that Britain’s economy could end up in a “doom loop” of falling currency and rising interest rates, but also insisted that recent market moves had been an over reaction. He told radio 4:

It is correct to be concerned about the fall in the pound and the rise in long term interest rates, and there is a risk that we do end up in a doom loop of a falling currency, rising interest rates and weaker growth which obviously would undermine the agenda of the new government.

But I also think that people have overreacted in the last few days in particular. If we step back a bit, actually almost all that the new government has done has been very positive and actually the sort of thing I would expect the IMF to welcome.

He pointed to the energy price freeze and the cancellation of tax increases (national insurance and corporation tax), adding:

On top of that is the supply side agenda. The key here is to get productivity up.

Jessop denied that a U-turn on measures like the scrapping of the top 45p income tax rate is a good way to restore confidence.

It’s only a few billion.

It’s not obvious to me that a U-turn on something like this would be positive for confidence. There are better ways to restore confidence. The government has made a start there, confirming that there will be another full fiscal statement in November with the OBR forecast that people are looking for.

Currency markets at least seem to be settling down. I’m more concerned about the rise in long-term government bond yields than I’m about the pound. The fall in the pound is still primarily more of a dollar story… But the rise in long-term interest rates, if sustained, and I hope and expect it won’t be, that could be far more damaging for the economy because that’s not just the government’s cost of borrowing, it also affects mortgages and corporate debt and everything else as well.

Julian Jessop, economist Photograph: Sarah Lee/The Guardian

Bridgewater founder: ‘excessive borrowing not sustainable’

Ray Dalio, a billionaire veteran investor and founder of Bridgewater, the world’s largest hedge fund, has explained why gilts and sterling have sold off, and expressed concern about the government’s understanding of the situation. He agrees with the IMF that the tax cuts were a mistake, and says that “excessive borrowing” is unsustainable.

The UK is running a large deficit which means it has to sell a lot of bonds and it’s running a current account deficit, which means it has to bring that money from abroad. And when you have more bonds to sell than the market wants to buy there’s a limitation and as a result there is a selloff. And that selloff is both a decline in bonds which raises interest rates and also a decline in sterling. This has been something that has happened a number of times in the UK, at real historic moments, and I would think that there would be an understanding of the mechanics of that by the government and that’s why it’s concerning…

I can’t imagine that this is intended and if it’s not intended, then it’s an understanding question.

You have to have real interest rates rise, you have to have interest rates rise higher than inflation. Past evaluations such as the 1992 ERM realignment is such that you would know that high enough interest rates don’t rectify the problem. It’s a basic thing. You can’t spend more than you earn without creating debt. And when that debt does not have a high enough return to compensate for inflation you’re going to have this kind of imbalance.

Asked about the government’s planned ‘dash for growth,’ he says:

That doesn’t make any sense. You can’t make wealth by running large deficits, you have to have lenders who want to own the debt and still it becomes a debt that is a burden. It doesn’t stimulate the economy, productivity is what stimulates the economy over the long run.

The IMF says the tax cuts were a mistake, and Dalio agrees.

Yes, it’s a mistake because it’s [sterling] not a major reserve currency and you need foreign money. You can’t do this without its consequences and yes it undermines the desirability of owning that. There’s a big dependence on foreign investment. Think about the losses that have come from the decline of sterling. It produces losses for foreign investors. And so it discourages foreign investors when that foreign investment is needed.

The imbalance could be corrected if “there is enough of a depreciation in the exchange rate and rise in interest rates” but this comes at a cost, he says.

That makes everything very cheap it means imported inflation goes up.

It corrects painfully the imbalance that’s produced by excessive borrowing. It’s not sustainable, it doesn’t raise living standards.

It leaves scars in the minds of those who invest in the UK.

Ray Dalio, founder of Bridgewater.
Ray Dalio, founder of Bridgewater. Photograph: Taylor Hill/Getty Images

You can read more of Starmer’s comments on our politics live blog, with Andrew Sparrow.

Starmer is now on BBC radio 4’s Today programme, talking about the IMF criticism of the UK’s tax cuts, a rare intervention by the Washington-based fund, and the market turmoil.

It reflects the fact that the government has completely lost control of the economy.

This is a government that has lost control of the economy and for what? To give tax breaks to those earning hundreds of thousands of pounds whilst working people have to pay more in prices. It’s the worst of all situations for our country to find itself in.

Starmer: November statement ‘far too long off’ to review tax cuts

Sir Keir Starmer, the Labour leader, said his own variable rate mortgage has gone up by a few hundred pounds. He told LBC radio this morning:

So many people with mortgages will be really worried by what’s going on because they know what this means for their their budgets – prices are going up.
We all look at the graph and we see the pound falling, but it’s not an abstract graph. This is reflected in people’s mortgages, etc. And people are very, very worried this morning.

He said the government has got to set out “how are they going to fix the problems that they have made”, with the November statement [on 23 November] “far too long off” to review the situation.

He also said his party was more united and confident than it had been in years and people at the Labour conference in Liverpool “can feel something in the air”.

And what they’re feeling in the air, I think, is change – because obviously, the government we’ve got has made an absolute mess of the economy and here you’ve got a Labour Party calmly, carefully and with confidence, setting out alternative plans for our economy and for our public services.

Labour leader Sir Keir Starmer listens to a speaker on day three of the Labour Party Conference in Liverpool
Labour leader Sir Keir Starmer listens to a speaker on day three of the Labour Party Conference in Liverpool Photograph: Christopher Furlong/Getty Images

UK house prices could fall 10% to 15%, warn analysts and brokers

Ray Boulger, from the mortgage broker John Charcol, has predicted a 10% fall in UK house prices next year, while analysts have warned prices could drop as much as 15%.

Boulger says the gilt market meltdown, and the risk of interest rates rising to 6% by next summer “makes it very difficult to know where to price mortgage products”. This will undoubtedly have an impact on the housing market. He told BBC radio 4’s Today programme:

We can expect to see a significant fall in house prices, perhaps 10% next year.

Whilst at the moment I don’t think we’re going to see many more forced sellers… it’s certainly going to have an effect on people’s ability to buy.

Analysts at Credit Suisse are warning that higher interest rates, rising inflation and the risk of recession could lead to house prices falling by between 10% and 15%. Andrew Wishart, senior property economist at Capital Economics, has also warned of a similar slump.

The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable.

Hundreds of mortgage deals have been pulled by banks and building societies, including HSBC and Santander.

Gilt yields hover at highest level since 2008 financial crisis

Kwarteng’s £45bn unfunded tax cuts, which mainly benefit the wealthy, have stoked fears of a borrowing binge and led to a government bond meltdown since Friday. The selloff has pushed up yields – the interest paid on government debt – which move in inverse relationship to prices.

The yield on the benchmark 10-year gilt, as UK government bonds are known, has retreated slightly but is hovering around 4.39%, up sharply from 3.1% before Friday’s mini-budget.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains:

[Yields] have hit the highest level since the financial crisis in 2008, which is piling pressure on mortgage holders, given gilt yields have an impact on swap rates, which guide lenders’ mortgage offers. Corporate bond yields have shot up even for investment grade companies, considered to be low risk, adding to worries that companies needing to refinance soon or borrow more to cope with rising input costs could struggle to make repayments.

To finance higher borrowing to pay for the tax cuts, an extra £72.4bn in debt sales are now planned for the current financial year alone. On top of this, the Bank of England plans to sell about £40bn of bonds over the next year to wind down its quantitative easing programme.

Introduction: Pound slumps after IMF urges UK to reconsider tax cuts

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

In a stinging attack, the International Monetary Fund has urged Liz Truss’s government to reconsider its tax-cutting plans to prevent stoking inequality.

In rare public criticism of a leading global economy, the Washington-based fund said Kwasi Kwarteng’s mini-budget risked undermining the efforts of the Bank of England to tackle rampant inflation amid the cost of living emergency.

It said a fiscal policy announcement planned by Kwarteng for 23 November presented an “opportunity for the UK government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners”.

Keir Starmer, leader of the opposition Labour party, said the IMF’s criticism shows how serious the situation is. He told LBC Radio:

The IMF statement is very serious and it shows just what a mess the government have made of the economy and it’s self-inflicted, this was a step they didn’t have to take.

On the markets, sterling is on the backfoot again, slumping as much as 1% to around $1.06, while the dollar has hit a fresh 20-year high as rising global interest rates stoked recession fears. The pound fell to an all-time low of $1.0327 against the dollar on Monday morning, and had traded around $1.1300 before Friday’s mini-budget.

Seen as a safe haven, the dollar rose 0.5% against a basket of major currencies to hit a new peak of 114.7 in Asian trade. The yield on benchmark US 10-year government bonds also climbed, to 4% for the first time since 2010, peaking at 4.004%.

Moh Siong Sim, a currency strategist at Bank of Singapore, told Reuters:

It’s a combination of the spillover from the UK… where the gilt yields have gone ballistic. And that has spilled over into other developed market bond markets, so there’s a bit of a ricochet effect.

And of course… this is against the backdrop of a very determined message by the Fed to do whatever it takes to bring inflation down.

The Bank of England is likely to deliver a “significant policy response” to the UK’s tax cuts, its chief economist Huw Pill said on Tuesday afternoon. But Pill also argued that the Bank should wait until its next scheduled meeting in the first week of November (rather than through an emergency rate hike).

Truss and Kwarteng apparently disagreed over how to deal with the crash in sterling. Downing Street denied that there was a row.

However, Whitehall sources said there was talk within the civil service of an argument between the prime minister and chancellor at their meeting on Monday morning, and Sky News said Truss had been resisting Kwarteng’s suggestion that a Treasury statement was needed to calm the markets.

The Agenda

  • 7.45am BST: France Consumer confidence for September (forecast: 80)

  • 8.15am BST: ECB president Christine Lagarde speech

  • 9am BST: Italy business and consumer confidence for September (forecasts: 102.1 / 95.1)

  • 9.15am BST: Bank of England deputy governor Jon Cunliffe speech

  • 1.30pm BST: US trade for August

  • 3pm BST: US Pending home sales for August

  • 3.15pm BST: US Federal Reserve chair Jay Powell speech


www.theguardian.com

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