The markets bet on another Truss-Kwarteng U-turn

The markets sniff another capitulation.

This afternoon, investors jumped on reports that Liz Truss is preparing to ditch the pledge she made on corporation tax. The pound rose by two cents against the dollar, and the yield UK government bonds eased to 4.5%.

The view on how high interest rates will have to rise to contain inflation also changed but investors are still betting that Bank Rate will reach 5.5% next summer.

That’s lower than the expectation of 6.3% we saw in the days after the chancellor delivered his mini-budget, but 4.5% was the thinking before Kwasi Kwarteng stood up in the Commons.

No wonder Tory MPs are so worried. A lot of households would struggle to withstand that sort of tightening.

Today, in Washington, the chancellor was standing his ground. He conceded that the financial markets are “very dicey” and that the announcement of his Growth Plan on 23rd September had caused “some turbulence” but he pointed out that high inflation and rising interest rates are “global challenges.”

Fair enough. Many countries are struggling with spiralling prices and central banks are hiking the cost of borrowing around the world. This adjustment is painful and has caused market instability.

Want a quick and expert briefing on the biggest news stories? Listen to our latest podcasts to find out What You Need To Know.

But announcing £45 billion of unfunded tax cuts at a time of rising interest rates, inevitably raises questions about debt sustainability.

And attempting to prime demand in the UK economy at a time when the Bank of England is trying to dampen it, is, in the view of the International Monetary Fund, more than a little bonkers.

In Washington today, the head of the IMF warned that unless governments and central banks work together to tackle inflation then a bad situation will become “dangerous”.

The chancellor was at the IMF making the point that there are many countries around the world where inflation is driving up interest rates - is that fair? ITV News Economics Editor Joel Hills has the latest.

Kristalina Georgieva told journalists she had met with the chancellor and the governor of the Bank of England and discussed “the important of policy coherence”. Ouch.

Meanwhile, back in London, the Bank of England spent £5 billion today buying UK government bonds from pension funds in distress.

Emergency support that was in very large part triggered by the government’s mini budget. Emergency support that the Bank insists will end tomorrow.