Pound rises on talk of mini-budget U-turn

UK shares have risen and the pound has held firm as speculation mounts about a possible U-turn over the mini-budget.

The FTSE 100 index of leading shares was up by around 1% on Friday morning, while the pound was trading above $1.12 against the dollar.

As the speculation continues, the BBC understands that Kwasi Kwarteng is out as chancellor.

Mr Kwarteng had returned earlier from the US for urgent talks in Downing Street.

The pound hit a record low of $1.03 in September after markets reacted badly to Mr Kwarteng’s mini-budget.

In it, he promised billions of pounds of tax cuts but did not explain how he would fund them.

On Thursday, the pound jumped by more than 2% to well above $1.13 against the dollar, as rumours circulated that a U-turn could be imminent. It has since slipped slightly, but remains at around $1.12.

Government borrowing costs have also fallen, after surging to worrying levels in the days after the mini-budget.

The Bank of England has been buying government bonds – known as gilts – to try to stabilise their price and prevent a sell-off that could put some pension funds at risk of collapse.

However, that support is due to come to an end on Friday.

There has been speculation it may be extended, although this was dismissed by the Bank’s governor, Andrew Bailey, earlier this week.

The government has already U-turned on its plan to scrap the top rate of income tax, but many Conservative MPs think a further change of plan is imminent.

Russ Mould, investment director at AJ Bell, said the financial markets were already pricing in a government U-turn.

“They started to [price it in] yesterday,” he told the BBC’s Today programme.

Mr Mould pointed to the fact that the yields – or the effective interest rate – on UK government bonds have been falling back in anticipation of a reversal to the tax-cutting plans.

On Friday morning, the yield on bonds that borrow money over 30 years fell to 4.26%. Yields on such bonds had hit 5.17% on 28 September in the aftermath of the mini-budget.

“Gilt yields came down… and sterling rose against the dollar to $1.13 and against the euro to €1.16, so I think they are starting to either expect, demand, sniff out that there will be some degree of U-turn possibly on corporation tax, dividend tax, other areas,” Mr Mould said.

Asked what would happen if there is no U-turn, Mr Mould said: “You would expect the gains that we’ve started to see, to unwind.”

The government raises money it needs for spending by selling bonds – a form of debt that is paid back plus interest in anywhere between five and 30 years.

Pension funds invest in bonds because they provide a low but usually reliable return over a long period of time.

However, the sharp fall in their value after the mini-budget forced pension funds to sell bonds, threatening to create a “downward spiral” in their prices as more were offloaded, which left some funds close to collapse.

This sparked an emergency intervention by the Bank of England, which stepped in to buy bonds and prevent their price falling further.

There has been strong speculation that the Bank will extend the scheme, which is due to end on Friday.

Bethany Payne, global bonds fund manager at Janus Henderson, told the BBC it was not clear whether pension funds have done enough to strengthen their finances.

“The risk is that we don’t know how pension funds have used this window of time and whether they have used it effectively by raising cash and doing everything they need to,” she said.

“So the true test of the market will be this afternoon and Monday morning to see whether they have done enough.”