U.K. Markets Rattled by New Government’s Tax and Spending Policies

Despite high inflation, Britain's new government announced a series of tax cuts on Friday.

The value of British stocks, bonds and the pound fell to the lowest level against the dollar since 1985.

Expectations that the Bank of England will need to raise interest rates even more aggressively to stop inflation have been raised by the plans. This will add to the cost of the tax cuts and spending plans that were already announced.

Britain's benchmark stock index fell more than 2% after the announcement by the new Chancellor of the Exchequer.

The pound and British government bonds were the most significant market moves.

The higher the bond yields go, the more expensive the new debt will be. The 10-year government bond's yield rose to its highest level in four years. The yield on the five-year bond rose by more than half a percentage point, a huge move in a market where daily changes are usually measured in hundredths of a point.

On Friday, the pound fell by 1 percent against the euro and by 2 percent against the US dollar. The British currency is losing money against the dollar.

The pound is vulnerable due to concerns over the U.K.'s fiscal position and recessionary outlook.

The government promised to accelerate economic growth with a combination of tax cuts and deregulation that was reminiscent of the 1980s under Prime Minister Margaret Thatcher. The first phase of an expansive plan to freeze the cost of gas and electricity for consumers will cost the government £60 billion over the next six months.

The markets will react according to Mr. Kwarteng. The growth plan will show that we are on the right path and that we are steering us to a more prosperous future.

Before the details of the new government's plan were announced, investors appeared anxious about Britain's fiscal state. Britain relies on the kindness of strangers to finance its economic plans because of its budget and balance of imports and exports.

Analysts atDeutsche Bank have been worried about investors losing confidence in Britain and being unwilling to finance its current account deficit. We are concerned that investor confidence in the U.K. is being eroded quickly. The only way to prevent the pound from falling is by the Bank of England hiking cycle.