Pound rises and UK borrowing costs drop as Hunt brings forward debt plan

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UK government borrowing costs fell sharply and the pound rallied after Jeremy Hunt announced he would bring forward some of his debt-cutting plans in an attempt to smooth over turmoil in financial markets.

In a surprise statement early on Monday, the chancellor said he would make a statement to the Commons to announce some of the measures from the government’s medium-term fiscal plan two weeks ahead of time.

The yield – or interest rate – on 30-year UK government bonds fell by more than 30 basis points in early trading on Monday, with a decline in borrowing costs across the board for short and long-dated bonds.

The pound rose by about 1% against the dollar, trading just below $1.13 on global currency markets.

“So far, gilt markets have reacted positively this morning to the latest fiscal press reports,” said James Smith, an economist at the Dutch bank ING. “But ultimately, the monetary value of the deficit reduction measures to be announced today matters, and so does the message sent about the importance of fiscal sustainability.”

The drop in bond yields comes despite the removal of the Bank of England’s emergency gilt market intervention at the end of last week, after the central bank insisted it would withdraw its temporary support measure.

Despite the fall in yields – which move inversely to bond prices – UK government borrowing costs still remain higher than before Kwasi Kwarteng’s ill-received mini-budget a month ago.

After sliding on Monday, yields remained at 4.4%, significantly higher than the 3.8% level seen the day before the former chancellor announced a package of unfunded tax cuts designed to boost the economy worth ?45bn. In the market chaos that followed rates peaked at about 5% before the Bank was forced to intervene.

Thanim Islam, a market strategist at the business payments firm Equals Money, said: “In early hours of trade the pound has risen on newfound confidence in the new chancellor, and the rumours of Truss being forced out.

“Today will be the first day the Bank of England will no longer be intervening in the gilt market. So far this morning, gilts are on the rise with yields dropping in a nod to Hunt’s changes in fiscal policy, and market activity that will please the Bank of England.”