— This is the script of CNBC's financial news report for China's CCTV on October 18, 2022.
New Chancellor of the Exchequer Hunt's announcement immediately calmed the markets. We've seen a positive reaction from both the currency and bond markets.
The pound rose against the dollar in response to the announcement of the policy change, then fell back slightly to around 1.135 at press time. This is well above the historic plunge of 1.03 when the large tax cut was previously announced.
In addition, we have seen UK 10-year and 30-year government bond yields fell in response.
Analysts believe that the market likes the fact that Jeremy Hunt is bringing forward the statement and that he does understand the importance of financial markets and speaking to investors.
Professor of Economics at INSEAD Antonio Fatas said that the U-turn demonstrated that the market used its own power to force the government to comply with fiscal discipline. In addition, it also reflects the game between the Bank of England and the government. Although the Bank of England stepped in to rescue the market, it set a time limit, forcing the government to turn over some fiscal policy.
We have also seen the market adjust to the Bank of England's expectations for future rate hikes. The latest market estimate is that the BoE's interest rate will peak next summer at about 5.2%. This is down from the 6.3% peak expected at the end of September.
Although Hunter's statement brought some "stability" to the market, Paul Johnson, the director of the Institute of Fiscal Economics, said in an interview with CNBC, the Truss government's previous policies had caused long-term damage to the British economy and fiscal balance.
Paul Johnson
Director of The Institute for Fiscal Studies
"There's undoubtedly a long term damage, because there's been more uncertainty created, there's lack of stability in policy. What you've seen the current chancellor do is try and re-assert that certainty and stability. And clearly the government is going all out to regain it at the moment."
Although the market is now calming down, most investors believe the future is still extremely uncertain, mainly because the future of the Truss administration is becoming increasingly uncertain.
Hunt reversed almost all of Truss' policies which led her to victory as Conservative Party leader and then as Prime Minister. Berenberg Bank called the policy reversal "a major humiliation for Truss" and said it would not be surprised if Tory MPs pressure Truss to resign in the coming days. And Citibank went even further, questioning whether the "Conservatives" are capable of navigating the current economic situation.
One focus of the current market is on how long Truss can remain in the prime minister's seat. Another focus is the medium-term fiscal plan which is to be announced on October 31. At that time, Hunt will announce more proposals on tax increases and spending cuts to ease investors' concerns about the government's liabilities in the coming years. And the Office for Budget Responsibility (OBR) forecast will take place on that day.