UPDATE: PM Liz Truss tells cabinet to find “efficiency savings” in wake of disastrous budget

Average mortgage rates rise above 2008 levels to 6%

Mortgage costs: Image nattanan23 / Pixabay

20:00 (September 28). Liz Truss, the UK’s Prime Minister has told her cabinet to find efficiency savings accordinfg to a Sky News source.

Although she denied that she would be making “public spending reductions” during her campaign to become prime minister, sources say that she is indeed looking to do so and these could put pressure on frontline services.

A letter is said to be going out to ministers asking them to find savings where possible andto  live within existing budgets as she works to reduce the borrowing levels suggested in the mini-budget. That level of borrowing is one of the main reasons for the financial turmoil in the country and the collapse in the pound.

The request precedes the Chancellor Kwasi Kwarteng’s plan that he is putting together to show markets and MPs that he can indeed bring the spiralling costs under control.

If indeed departments are to be asked to remain within existing budgets and to make savings, the cuts will be second only to those made under Cameron / Osborne years when departments were forced to cut budgets by 20 per cent.

Critics have said that Truss is preparing to cut budgets and front line services through the back door, even though she said in July that: “I’m very clear I’m not planning public spending reductions, what I am planning is public service reforms.” 

19:45 (September 28). Former chancellor Lord Kenneth Clarke has said that he has never known a budget to cause an immediate financial crisis as this one.

Speaking about the budget he told Sky News: “I was hoping that we’d gone through a circus of the leadership election and we were now going to get down to dealing with a serious national crisis.

“But they have made a catastrophic start, the budget was a serious mistake, and it has caused a serious problem.”

He added that: “A budget was put forward in the apparent naive belief that firstly they had to deliver tax cuts so that they would get a good headline the next day, and that if you gave tax cuts to the very rich, that you would attract really good bankers to London.

“That would get back to growth, and it would trickle down to everybody else.

“Well, I hope that’s all been torn up and then are sitting down listening to the Treasury, the Bank of England and those serious economists, I’m sure, are happy to give them proper advice,” he added.

Lord Clarke explained that a “clear statement” is needed, establishing a “sensible, prudent way of getting inflation down”.

18:15 (September 28). Pension funds would have collapsed today without BoE action – with ‘mass insolvencies’

The Bank of England’s intervention announced today was in response to a “run dynamic” on pension funds, Sky News’ economic editor Ed Conway has been told. 

If the bank had not intervened, there would have been “mass insolvencies of pension funds by this afternoon”, he said. 

“It’s very similar in kind of wholesale terms to what we saw with Northern Rock when there was that run on that bank back in 2007,” he explained.

“It’s a vicious cycle. Essentially, people trying to withdraw money, which in turn sometimes leads inevitably to financial collapse. 

“I am told there were a swathe of pension funds that, were it not for the government’s intervention, would have essentially collapsed by this afternoon – that’s how fast moving this crisis in the pensions markets was. 

“It is the gilts market that lies underneath, that defines benefit pension schemes, all of whom are reliant on that market for their funding and for the structure of their investments. 

“The scale of this crisis is now becoming clearer. 

“We have seen a big reaction in those markets where the bank has gone and started to buy those securities, but it is an extraordinary day and an extraordinary event. 

“They believe that they may have done enough now for the time being, it’s a two-week course of emergency buying of some of these assets, but we have never quite seen anything like this before.”

18:15 (September 28). A treasury spokesperson has confirmed that British Chancellor Kwasi Kwarteng will not be resigning and that there will be no reversal of the policies announced in his recent mini-budget.

The source was confirming an earlier report by Sky News to news site Reuters, after calls were made for the chancellor to change tack. These were accompanied by reports that MPs were already preparing to remove the new cabinet should the situation caused by the chancellor’s mini-budget continue.

17:45 (September 28). The Bank of England has moved to stabilise the bond market, which caused lenders to withdraw most mortgage products overnight.

The bank announced today that it would buy up to £65 billion of the UK government’s debt at a rate of up to £5 billion a day. Announcing the move the bank said that it would buy British government bonds of at least 20 years’ maturity starting on Wednesday and running until Oct. 14.

Buying bonds is a policy reversal with the bank having planned to start selling bonds it had amassed since the global financial crisis of 2008-08, however, it did have the desired effect immediately pushing down borrowing costs.

Making the announcement the bank said: “Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability.”

Although the announcement brought stability to the bond market, it has the opposite effect on the international currency markets where the pound fell by one per cent during the days trading.

17:18 (September 28). A record 935 mortgage products were pulled on Tuesday night as UK financial markets remained in turmoil.

Moneyfacts reported on Wednesday, September 28 said that the banks had been pushed into making the unprecedented move after the chancellor’s mini-budget sent the markets into a tailspin.

The Bank of England responding to the collapse in the pound on Monday had said it would do whatever it needed to do to protect the pound and to keep the inflation rate within the target two per cent. That led to fears of sharp rate increases.

Government bonds which influence the cost lenders pay to borrow money have risen quickly as a result of the Bank’s intervention. That has made it difficult for bankers to price mortgages, with mortgage expert Ray Boulger from broker John Charcoal telling BBC Radio: “(Lenders) just don’t know where that is going to go, how higher it is going to go, where it’s going to stop.

“So it makes it very difficult to know where to price their mortgages.”

He continued saying: “I think we can expect to see a significant fall in house prices – I’m suggesting perhaps around 10 per cent next year.”

The record 935 mortgage products pulled surpasses the eighties financial crisis which saw borrowing costs rise to unprecedented levels and a massive slump in the housing market.

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Written by

Peter McLaren-Kennedy

Originally from South Africa, Peter is based on the Costa Blanca and is a web reporter for the Euro Weekly News covering international and Spanish national news. Got a news story you want to share? Then get in touch at editorial@euroweeklynews.com.