Gilts Tumble And Markets Rattled By Tax Cutting Budget And Rising Interest Rates

Solicitor-Advocate (In-House Company Solicitor)

This week we learned that the end is nigh, or at least the era of rock bottom interest rates and sub-2% inflation. The

This week we saw two nuclear options – the not so veiled threat by Valdimir Putin to use nuclear weapons in Ukraine and the new Chancellor, Kwasi Kwarteng, delivering the first Budget of the Liz Truss era.

Truss and Kwarteng have opted for tax reversals and tax cuts in an effort to jolt the UK economy after years of stagnation, policies that come straight from Thatcher’s playbook. However, had Thatcher been in power today, would she have applied her 1980s’ policies to an economy that looks very different and faces a host of different problems. That’s something we’ll never know, but it definitely raises the political and economic stakes.

Markets reacted badly to the announcements as gilts sold off sharply on the prospect of a large increase in government borrowing to pay for the measures. Equities have also fallen on the back of a drop in services and manufacturing output and depressed consumer confidence. Truss and Kwarteng are gambling that their tax cuts are strong enough to generate sufficient future economic growth to cover their short to medium-term cost. The effect has managed to push sterling back to levels last seen in the early 80s.

Meanwhile, Russian President Valdimir Putin, probably reeling from the set backs in Ukraine, issued a veiled threat to use nuclear weapons if Russia’s sovereign territory is threatened. Many commentators believe this means that if the so called referendum’s in Eastern Ukraine result in a vote to become part of Russia, which no doubt they will given the circumstances, then Russia may use strategic nuclear weapons against the Ukrainians and possible their allies, to reverse what currently looks like an inevitable defeat.



The US Federal Reserve hiked rates by 0.75% for the third month in a row, cut its estimate for growth for this year and forecast that rates will hit 4.4% by the end of the year before peaking at 4.6% in 2023. The Bank of England increased the base rate by 0.5% while four other banks also raised rates. Sweden’s Riksbank raised rates by 1% and the Swiss National Bank hiked rates by 0.75% to lift the Swiss rate out of negative territory for the first time in seven years. The South African Reserve Bank and the Norwegian Central Bank also raised rates in the global fight against inflation.

The scale of the Riksbank hike contributed to a big sell-off in government bonds early in the week. Most developed government bonds continued to slide after the US rate decision and global equities sold off as investors anticipate recession after US Fed chairman Jerome Powell said rates are going to be raised high enough and for long enough to cause some pain to the economy, including increasing unemployment.

The US Federal Reserve’s rate hike and Russia’s (partial) mobilisation to recruit a further 300,000 troops to fight in Ukraine caused the dollar to appreciate sharply. The US Dollar Index is now at its highest in 20 years having risen by almost 1% on Wednesday. This is putting huge pressure on other currencies. The pound fell to under $1.11, while the euro was trading around $0.98 – having dropped to parity only a month ago. Weakness against the dollar is not confined to western economies.

This week the Bank of Japan intervened in the currency markets for the first time since 1998 to try and prop up the depreciating currency as the yen has fallen around 20% this year. The Chinese yuan has fallen to $7 and is hitting a level that saw the Chinese government accused of currency manipulation only three years ago.

The strength of the dollar is causing considerable problems for economies outside the US as net-importers risk importing higher inflation and demand for dollars contributes to tighter monetary conditions and increases the risk of a global recession.


The value of UK government bonds tumbled after chancellor Kwasi Kwarteng delivered his mini-Budget to the House of Commons. Kwarteng unveiled a much wider package of tax reversals and tax cuts than expected, with the abolition of the 45p additional rate of income tax, a 1p cut to the basic rate of tax (April 2023) and cuts to stamp duty in addition to the expected scrapping of the Corporation Tax rise and the reversal of the increase to National Insurance. If you’re considering wealth management, visit our dedicated webpage to find out how we can help.

The reforms will see a sharp drop in government tax receipts in the short to medium term and the Treasury has confirmed it plans to raise an additional £72bn this year to pay for the reforms. With gilts already under pressure due to rising interest rates and the need to finance the energy price cap, markets reacted badly to the likely increase in government borrowing, and gilts of all durations sold off heavily. Short-dated gilts are back to levels last seen before the financial crisis while the yield on 10-year gilts rose above the equivalent on US 10-year Treasuries. The pound also dropped sharply as it fell below $1.11 – a level last seen in 1983.


Whilst markets have been exceptionally difficult this year, which continued over the past quarter, we have achieved what we set out to do which was to avoid the heavy losses, maintain significantly lower volatility (risk) within our client portfolios than the Cautious, Balanced and Growth multi-asset benchmarks, – and in so doing, we have again out-performed these risk-rated benchmarks.

Following our September Investment Committee Meeting, all remaining revised asset allocation reviews and rebalancing proposals and across the risk profiles will be with our managed advisory clients by close of business tomorrow.



Please note that nothing written here by the author should be construed as giving advice, it merely outlines our thinking.  Any advice will be discussed and proposed on an individual basis with each client when any advice that is given should be fully discussed with us before proceeding with any proposals made.

If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week. 

Yours sincerely,


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