British Pound, Gilts Weak as Truss’ Energy Program Fuels Debt Fears By Investing.com

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© Reuters

By Geoffrey Smith

Investing.com — The market hit a new low and UK government bond prices fell as markets worried about the rising cost of steering the country through an energy crisis over the past year. next winter.

The pound tested $1.13 against the dollar, a level it hadn’t seen since 1985, before rallying later in the session, while the yield on the benchmark 10-year gilt rose. rose 6 basis points to a new 11-year high. by 3.35% after the government unveiled its latest measures to cap companies’ energy bills, which analysts said could cost between 25 and 40 billion pounds ($28 to 45 billion). Truss had previously been forced to announce a similar household relief package, which is expected to cost more than £100billion.

Businesses have warned that without government support, a wave of closures due to soaring energy bills will be inevitable this winter. Shevaun Haviland, chief executive of the UK Chambers of Commerce, said the plan represents “a clear step in the right direction”, but warned that its time-limited nature – the support scheme will only last six months – still leaves business in a position where long-term planning will be next to impossible.

“We understand that there are a range of unknowns for the government in its outlook for the future, but without more assurance very few companies will make plans to invest or grow,” Haviland said in a statement. communicated.

The pain relief package for businesses came the same day that new data showed an unexpected surge in government borrowing in August, largely due to a sharp rise in inflation-linked debt service from the government.

Interest payable on central government debt was £8.2bn last month, £1.5bn more than a year ago, and the highest figure for August since the start of the monthly statements in April 1997, the National Statistics Office said, pointing to the sharp rise in interest payments on inflation. – Tied gilts.

Like most other developed economies, the UK borrowed heavily to get through the COVID-19 crisis, when tax revenues collapsed and spending to support the economy soared. The budget deficit narrowed last year as those support measures were removed and the economy reopened, but the public debt burden of $2.5 trillion, at 96.6% of gross domestic product, was still up nearly 2 percentage points from a year ago.

The cost of servicing this debt will likely consume more and more government revenue if it continues to rise, as Bank of England (and most private sector) forecasts suggest. Indeed, a quarter of the United Kingdom’s public debt is financed by bonds which pay interest linked to the rate of inflation.

Government borrowing costs are likely to come under further pressure if, as expected, the Bank of England hikes again at its monetary policy committee meeting on Thursday. Analysts expect the Bank to raise its refinancing rate by 50 basis points. The Bank has also signaled that it wants to start selling its portfolio of gilts accumulated over the years of “quantitative easing”, targeting net sales of 10 billion pounds per quarter. With the Bank joining the list of net gilt sellers, this should put even more upward pressure on yields.

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