Pound falls after UK’s fiscal watchdog meets Liz Truss and Kwasi Kwarteng – business live

The pound has fallen even more, as it becomes clear that the fiscal watchdog’s independent assessment of the government’s tax cuts and other plans won’t be published until the medium-term fiscal policy statement on 23 October.

Sterling is now down 0.36% at $1.1075.

Our political editor Pippa Crerar has tweeted:

Following a meeting with Prime Minister Liz Truss and Kwasi Kwarteng, the Office for Budget Responsibility has confirmed it will deliver an initial forecast to the chancellor on 7 October which “will, as always, be based on our independent judgment about economic and fiscal prospects and the impact of the government’s policies”.

The OBR said its budget responsibility committee had met with the prime minister and the chancellor this morning.

We discussed the economic and fiscal outlook and the forecast we are preparing for the chancellor’s medium-term fiscal plan.

We will deliver the first iteration of that forecast to the chancellor on Friday 7 October and will set out the full timetable up to 23 November next week. The forecast will, as always, be based on our independent judgment about economic and fiscal prospects and the impact of the government’s policies.

It doesn’t look like the OBR’s forecast will be published to the public that day. We’re trying to find out more…

Inflation in the eurozone hit a record rate of 10% in September, cementing expectations for another big interest rate hike from the European Central Bank.

Price growth in the 19 countries sharing the euro jumped from August’s 9.1%, data from Eurostat showed. The figure was higher than the 9.7% forecast by economists.

Inflation in Germany jumped to 10.9% from 8.8% and price growth in Italy hit 9.5%, up from 9.1%, while French inflation slowed to 6.2% from 6.6%.

Meanwhile, the unemployment rate in the eurozone was 6.6% in August, stable compared with July and down from 7.5% in August 2021.

After briefly dipping into negative territory, sterling has extended gains and hit a fresh one-week high, of $1.1235, up 1% on the day. Trading is volatile, though, and it is now at $1.1193, a 0.7% gain.

Liz Truss and the chancellor, Kwasi Kwarteng, are meeting with the head of the Britain’s independent fiscal watchdog on Friday, after days of financial market turmoil triggered by the government’s package of unfunded tax cuts announced a week ago. This is clearly seen as as positive development by financial markets, along with the news that the UK economy grew by 0.2% in the April to June quarter, rather than shrinking by 0.2%.

Craig Erlam, senior market analyst at Oanda, says:

Though it really does not change anything, it does mean the economy is suddenly on a sounder footing and may not be in a technical recession.

However, revisions to past data mean GDP is still not back to pre-pandemic levels, and make the government’s fiscal plans “look even more untenable,” says Capital Economics’ chief UK economist Paul Dales. “It’s the only G7 economy in that situation.”

UK and European shares are heading higher, on the last day of what has been a turbulent month/quarter. The FTSE 100 index in London is 49 points, or 0.7%, ahead at 6,929 while the German, French and Italian main indices have each gained about 1.1%.

Housebuilders Barratt, Taylor Wimpey and Persimmon, and the retailer Next are leading the gains on the FTSE 100, after falling sharply yesterday. Lloyds Banking Group is also one of the main risers.

Erlam explains:

The financial stocks move along with risk appetite in the market. Any type of stabilisation will typically see financials perform well.

Alistair Darling, now a Labour peer who was chancellor of the exchequer during the financial crisis of 2008, has also been on the radio, speaking about the government’s loss of credibility and what it needs to do to regain trust.

Interviewer Justin Webb notes that Truss and Kwarteng had sacked the permanent secretary to the Treasury, who could have given expert advice on the mini-budget.

Lord Darling said:

They just appear to be complete novices, suddenly being presented with a new toy to play with and they didn’t understand what they were doing.

When you do a normal budget, it takes weeks of planning, not just what you want to do, how you present it and how you go out and explain it on the day.

The problems the government has got into now are entirely self-inflicted. This isn’t a global problem. They decided that one of the first things they wanted to do was to announce a huge amount of tax cuts, but they hadn’t gone through the obvious question how are you going to pay for this, is it borrowing, are you going to have to cut fiscal spending.

I know from my own experience: if you lose control, if you lose credibility, it takes a long, long time to get it back.

They really have damaged themselves.

Question: How do you get credibility back?

“With some difficulty,” Darling replies.

The first thing they’re going to have to do is to explain how they’re going to pay for this. And it turns out that the OBR actually had an analysis and the government chose to effectively suppress it. That suggests that what the OBR had to say wasn’t entirely complimentary or supportive. What they’ve got to is to publish a plan for paying for this and if it does mean that they’ve got in mind cutting public expenditure, they’ve got to say that’s what they are planning to do.

The government could reverse some measures, like scrapping the top rate of tax, which “was completely unnecessary and they need to explain how they’re going to pay for it”.

The real problem you’ve got here is that the fiscal policy, tax and spend side of it and the monetary policy, that’s interest rates and buying bonds, the two are not joined up. I wonder whether the chancellor ever spoke to the governor and told him what he was going to do.

This is not an orderly way to do business. If you’re going to do something like this you need to think it through, it needs to be orderly, you need to think about the consequences , you need to have answers to the questions that are being put, none of that seems to be evident at the moment.

Andrew Griffith, the new City minister and former senior media executive, has been quizzed by Justin Webb on BBC radio 4.

Asked about the mortgage market turmoil sparked by last Friday’s mini-budget – more than two-fifths of mortgage deals have been pulled from the market – Griffith sidestepped the questions, and said:

We understand the aspiration to buy your own home and we understand the concerns of course of every household in this country.

There’s a whole package of measures that we want to come forward with that’s going to help the housing market, that’s about building new homes.

We’ve seen a particular dynamic over the last week, that’s absolutely the case… the Bank of England has done its job in terms of stabilising the market but in fairness this all stems to the world changed on 24 February, the issue about the cost of energy, yesterday German inflation hit 11%, that’s higher than inflation in the UK.

He has defended the government’s decision not to publish the independent fiscal watchdog’s assessment of its mini-budget alongside it, suggesting that the detail of the 40-page growth plan made it impossible for the OBR to carry out an independent assessment before the government published it.

I’t’s important that we now go forward and get the independent forecasts. That’s the job of the OBR and the chancellor asked them to do that for the 23 November and the reason for that is there’s a lot of measures about how we’re going to grow the economy and the details have yet to come out.

There is a long silence after Webb presses him repeatedly on whether it was a mistake to publish a partial package of measures, pointing to the financial markets’ view that the package was “fiscally irresponsible”.

The City minister told Sky News:

That [OBR] forecast wouldn’t have had the growth measures in that plan. They were being finalised in the hours before the chancellor stood up.

Let’s return to the GDP figures, which showed the UK economy grew by 0.2% between April and June, rather than shrinking by 0.1% as previously estimated.

Paul Dales, chief UK economist at Capital Economics, says:

The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels. It’s the only G7 economy in that situation and it makes the chancellor’s fiscal plans look even more untenable.

So despite the better news on the performance of the economy in Q2, the overall picture is that the economy is in worse shape than we previously thought. And that’s before the full drag from the surge in inflation and leap in borrowing costs have been felt.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, has tweeted:

Mel Stride, the Conservative MP who chairs the Treasury select committee which wants the OBR’s independent forecast scheduled for 23 November to be pulled forward, has been on BBC radio 4’s Today programme to talk about Truss’s and Kwarteng’s meeting with the fiscal watchdog. He said:

The good news is clearly this is being very taken seriously because confidence in the markets needs to be regained and critical to doing that will be to go to the markets and say the OBR has carried out an independent forecast of the proposals put forward by the government and measured against reasonable and credible fiscal rules. The OBR’s view is that those rules can be met.

That will be a very difficult conversation because of course the judgement so far of the markets and indeed myself and many others is that what was announced last Friday unfortunately doesn’t stack up fiscally and some changes are almost certainly going to need to be made…We can possibly have a major reset moment in which confidence can be regained.

It begs the big question to what the OBR will be saying to the prime minister and the chancellor in this meeting today. I suspect strongly that it will be that the circle cannot be squared. You can’t come forward with multiple billions of unfunded tax cuts in a high inflationary environment with a very tight labour market and expect that along with various supply side changes, to develop the growth that’s going to pay for those tax cuts. That’s just not feasible and isn’t going to work, so there needs to be a rethink, and that will be a very difficult conversation.

The Bank of England’s monetary policy committee meets on 3 November to decide on interest rates, and needs to have the OBR’s estimates, and so the publication of the OBR forecast should be brought forward from 23 November – and to “give the markets greater confidence,” Stride argued.

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The pound has edged higher, ahead of a meeting between Liz Truss and the chancellor, Kwasi Kwarteng, with the head of the Britain’s independent fiscal watchdog on Friday, after days of financial market turmoil triggered by the government’s package of unfunded tax cuts.

Last night the Office for Budget Responsibility confirmed that it had done a draft forecast to be produced alongside last week’s mini-budget and had given it to the chancellor. However, Kwarteng chose not to publish it, which is one of the reasons why the market reacted so badly to his mini-budget.

The pound has recovered from its losses and hit a one-week high of $1.222 early in Asian trading. Following the GDP figures, sterling was trading at $1.1134, up 0.18%.

This means sterling could be on track for its biggest weekly gain since 2020, despite plummeting to a record low of $1.0327 on Monday.

The euro has also bounced back versus the dollar, and is trading slightly higher at $0.9821.

Sean Callow a strategist at Westpac in Sydney, has warned that the pound’s recovery may not last. He told Reuters:

The recovery in cable is very eye catching… But with the UK already running very large current account deficits, we doubt there is much more upside in sterling.

Britain’s economic picture was better than previously thought in the April to June quarter, but the economy continues to slow, warned the statistics office.

The UK economy grew by 0.2% in the second quarter, rather than shrinking by 0.1% as previously thought, according to final figures from the Office for National Statistics. But it added that the economy’s overall size is smaller than previously estimated, 0.2% below its pre-pandemic level.

“I’d never seen anything like it”: how market turmoil sparked a pension fund selloff. The Guardian’s banking correspondent Kalyeena Makortoff and Sarah Butler have looked into the chaos that prompted the Bank of England’s emergency intervention in the government bond market on Wednesday.

Asian stocks fell again, and are heading for their worst month since the onset of the Covid pandemic, amid worries about a global recession and other risks. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.3%, taking its monthly loss to 13%. Japan’s Nikkei has lost 2.1% while the Australian market has shed 1.2%.

The Agenda

• 7.45am BST: France inflation for September (forecast: 5.9%)

• 8.55am BST: Germany unemployment rate for September (forecast: 5.5%)

• 9.30am BST: Bank of England mortgage approvals and consumer credit for August

• 10am BST: Eurozone inflation for September, flash estimate (forecast: 9.7%)

• 10am BST: Italy Inflation for September (forecast: 8.7%)

• 1.30pm BST: US PCE price index for August

• 3pm BST: US Michigan Consumer sentiment final for September (forecast 59.5)