The pound rises after the UK government says it will abandon its plan to cut taxes for the rich
- The British pound rose Monday after the UK government abandoned its plans to cut taxes for the rich.
- The UK currency climbed to close to where it sat before the policy was announced last month.
The British pound rose against the dollar early Monday after the UK government made a U-turn on its plan to cut taxes for the rich, which had spooked investors and rattled markets.
The UK's finance minister, Kwasi Kwarteng, confirmed earlier reports the government was poised to abandon the plan to abolish the 45% top rate of income tax, the BBC reported Monday.
The pound touched $1.1263 soon after the reports emerged, back near the levels it traded at on September 23, before Kwarteng announced the new government's tax-and-spending proposals. It had risen 0.14% to trade at $1.1184 at last check.
The UK currency tumbled to an all-time low last Monday after Kwarteng hinted there could be even more tax cuts coming.
Investors were spooked by the debt-funded policy, which weighed on stocks and other markets. They were concerned it would fuel inflation, lead to a faster pace of interest-rate rises, and undermine the UK's already struggling economy.
The U-turn comes after a number of lawmakers from the ruling Conservative party spoke up against the planned tax cuts and as polls showed popular opposition to the move. The proposals were the most aggressive in nearly 50 years, as they scrapped the top rate of income tax and slashed basic rates by 1%.
The International Monetary Fund sharply criticized the sweeping fiscal package, which also included plans to abandon a scheduled rise in the national insurance rate (social security tax) and to lower taxes on property purchases below 250,000 pounds. The IMF said it would work at cross-purposes with the Bank of England's monetary tightening to combat inflation.
While markets welcomed the U-turn, analysts said that abandoning the policy reflected the uncertain positioning of new prime minister Liz Truss's government, which could inject more volatility into markets.
"There is no denying that the move makes the government look incompetent, which is less than favourable for political stability in the UK," City Index analyst Fiona Cincotta said. "The pound has been behaving more like an emerging market currency in recent weeks, and this behaviour from the government will do little to change that the perception."
"The first major U-turn within the first month of rule isn't exactly an encouraging start for Liz Truss' government," she added. "The move could potentially limit gains in sterling as the market frets over the governments ability to ride this storm out in a coherent manner."
Yields on 10-year UK government gilts fell 6.9 basis points to 4.08% Monday, but have still climbed sharply over the last few months.
"Shelving the top rate of income tax cut provides short term relief to hard pressed Sterling and UK bond markets, but the government is not out of the woods yet with the vast majority of its unfunded spending plans still intact, from cuts to national insurance and basic income tax, to corporation tax and alcohol," eToro strategist Ben Laidler said. "Much of the damage from last week is also still visible, with 10-year bond yields up by a quarter from early September and by half from August, implying higher costs for all borrowers."
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