Pound gains after UK government U-turns on cut to top tax rate

The pound jumped nearly 1 per cent to US$1.128, its highest in 10 days. PHOTO: EPA-EFE

LONDON - The pound gained on Monday on news Britain would reverse plans to cut the highest rate of income tax, one contentious part of a package of financial measures that last month sent sterling and British government bonds into meltdown.

The U-turn comes after the government’s fiscal plans triggered a crisis of investor confidence, jolting markets to such an extent that the BoE had to intervene with a £65 billion (S$104.5 billion) bond-buying programme.

The pound gained as much as 1 per cent to US$1.128 on initial media reports of the U-turn, the currency’s highest level since the day before Mr Kwarteng announced the “growth plan” that cut taxes and regulation, funded by vast government borrowing.

Sterling later pared some of its gains and was last up 0.6 per cent at US$1.12305.

Against the Singapore dollar, the pound jumped as much as 0.6 per cent to $1.6166, before easing to $1.6065, up 0.17 per cent from the previous day’s close.

The pound had slumped to a record low versus the United States dollar last week in the days after the mini-budget of $1.03270.

Analysts said the move - which reverses £2 billion out of £45 billion of planned tax cuts - would support the pound, but warned further government action may be needed.

“This probably won’t be enough on its own to restore confidence - whether that’s reversing more tax cuts or plans to reduce spending. Markets will still want their pound of flesh,” said Lee Hardman, currency analyst at MUFG.

Jan von Gerich, chief analyst at Nordea, said it would probably take markets time to “buy the message” but that it was a step in the right direction.

“Questions still remain and sterling will likely remain under pressure,” he added.

The yen, meanwhile, fell as low as 145.4 to the US dollar despite remarks from Japanese Finance Minister Shunichi Suzuki that the government would take “decisive steps” to prevent sharp currency moves.

It was the first time the yen has fallen through the 145 barrier since Sept 22, when Japan intervened to prop up the currency, which has hit 24-year lows against the dollar this year. It later pared some losses and was last at 145.18. REUTERS

• With additional information from The Straits Times

Join ST's Telegram channel and get the latest breaking news delivered to you.