Arabnews24.ca:Wednesday 28 September 2022 10:41 AM: Here's our not-so-mini guide to what's going on with the economy since the not-so-mini budget announced by Kwasi Kwarteng on Friday.
It comes as the Bank of England launched a temporary bond-buying programme as part of emergency action to prevent "material risk" to UK financial stability.
What did the chancellor announce?
The biggest tax cuts for 50 years, with a stamp duty cut, a hike in National Insurance scrapped and a planned corporation tax rise shelved, and there was the multi-billion-pound help for households and businesses over energy bills.
There was also a cut in the basic rate of income tax being brought forward a year to April 2023 - and then the rabbit out of the hat, the 45p top rate of tax ditched, which benefits those earning more than £150,000.
All this to be paid for with additional government borrowing.
What was his idea?
These measures, along with reducing red tape on planning laws, adding red tape to make industrial action harder, and ditching the EU's cap on bankers' bonuses, are designed to stimulate growth of 2.5% in the medium term.
It has been labelled "Trussonomics" but this kind of policy is better known as "trickle-down economics", the idea being that if the rich, and wealthy companies, are taxed less, they'll invest more in the UK and, bluntly, the money will trickle down to those on lower incomes.
Tax cuts will therefore pay for themselves, so the theory goes.
Tax cuts? I like the sound of that - why has the reaction been so bad?
Mr Kwarteng's announcement was not called a budget because it's only a budget if the Office for Budget Responsibility provides costings and forecasts to go with it.
It is this lack of detail that has spooked markets.
There is also a belief that the chancellor's measures could raise already-spiralling inflation (the rate at which prices are rising, which currently stands at around 9.9%) at a time when the Bank of England is trying to bring it down (by raising interest rates).
So the pound fell - what does that mean?
When foreign exchange markets lose confidence in a country, the value of that country's currency begins to plummet.
Falls on Friday continued on Monday - with the value of the pound sinking from $1.12 to a record low of $1.03. It has steadied now to around $1.06.
Ok, what does this mean for me?
A weaker pound means price rises for UK consumers who buy foreign goods - which is just about everyone.
The UK imports more than 50% of its food - so the cost of coffee, bananas, pasta and everything else could go up.
Fuel could rise, too, as gas is priced in dollars.
A weak pound also means money won't go as far if you travel to the US or countries that use the US dollar.
Why would interest rate rises be needed?
When inflation rises, as many economists think it will following Friday's mini-budget, monetary bodies raise interest rates so that people spend and borrow less - in theory, easing inflation.
So interest rates will go up again?
They currently stand at 2.25% having been raised steadily from 0.1% at the end of last year.
They were always likely to rise again at the Bank of England monetary policy committee's (MPC) next six-weekly meeting on 3 November - but there has been speculation an emergency rise could happen before then.
The bank has said it is monitoring the situation, and its chief economist said yesterday that a "significant" intervention would be needed to steady the economy.
On Monday, Bloomberg raised its peak forecasts for interest rates to 6% for next year - and some forecasts are now higher than this.
This would raise average mortgage repayments by 50% from current rates.
Why are mortgage products being withdrawn and why are banks already raising rates?
This is because mortgages are long-term loans, and banks set their rates based on where they think interest rates are going.
Nationwide, Halifax and Santander are just some of the banks to withdraw deals or raise rates - and over the 24 hours into Wednesday, the UK has seen its biggest-ever drop in the number of available mortgage products.
Read more:
Bank of England's response is almost unthinkable
Five reasons the fall in the pound matters
What's all this about gilts/bonds?
A government bond, also known as a gilt, is a type of debt-based investment, where you loan money to the government in return for an agreed rate of interest.
The bonds are used to increase funds, which in turn can be spent on new projects or infrastructure by the government.
The Bank of England has now launched a temporary bond-buying programme as it takes emergency action to prevent "material risk" to UK financial stability.
It is trying to steady the economy and, specifically, prevent a crisis in pension pots.
What happens next?
A lot has changed in the last few days, and you'd need a crystal ball to answer this question.
A lot depends on how the markets continue to react, whether Tory MPs become restless or the new government changes course, and whether the Bank of England is successful in steadying the economy.
Some dates for the diary are 3 November, when the MPC meets to decide on a new rise in interest rates, and 23 November, when Kwasi Kwarteng has promised more detail on his economic plan.
Whether he can wait that long is up for debate.
For all the latest updates on the economy and cost of living crisis, you can follow our blog here.
