Pound and gilts surge as UK officials mull U-turn on tax cuts

THE pound and gilts surged on reports that UK officials are working on a U-turn of the sweeping tax cuts proposed by Prime Minister Liz Truss. 

The yield on 30-year bonds dropped as much as 46 basis points to 4.36 per cent. The pound rallied 1.8 per cent to US$1.1295. The FTSE 100 Index was up 0.6 per cent. 

Traders pared bets on how much the Bank of England will hike at the next meeting in November, to below 100 basis points, compared to 111 basis points earlier.

UK officials at No. 10 and the Treasury are discussing how they can back down from the package of tax cuts, according to a source familiar with their conversations. The officials are drafting options for Truss, but no final decision has been taken, and they are waiting for Chancellor of the Exchequer Kwasi Kwarteng to return to London from Washington, the source said, asking not to be identified commenting on private discussions. 

“Has the government finally heeded the calls from markets and the Bank of England? Price action in gilts and the pound suggests markets believe so,” said Simon Harvey, head of FX analysis at Monex Europe. “If the rumours are to be believed, we are now finally looking at a potentially more fundamental basis for traders to turn bullish on the pound.”

Bond markets have been in the grip of extreme volatility ever since the tax cuts were announced, with the turmoil forcing the Bank of England to step in with emergency action to prevent a broader financial stability risk. BLOOMBERG