Swap rates surge after Autumn Budget

Chancellor Jeremy Hunt announces a series of tax rises and spending cuts in an attempt to balance the books

The pound fell sharply against the dollar and the euro after Chancellor Jeremy Hunt announced a package of tax rises and spending cuts in his Autumn Budget. Swap rates, which are used by banks and other financial institutions to hedge against interest rate risk, also surged.

The main announcements in the Budget included a rise in corporation tax from 19% to 25% from April 2023, a freeze in income tax personal allowances and a reduction in the threshold for paying national insurance. The government also announced plans to cut spending by £30bn over the next four years.

The markets reacted negatively to the Budget, with the pound falling by more than 1% against the dollar and the euro. Swap rates also surged, with the two-year swap rate rising by more than 0.2% and the five-year swap rate rising by more than 0.3%.

The rise in swap rates is a sign that investors are expecting interest rates to rise in the future

Swap rates are a forward-looking indicator of interest rates, and the recent surge suggests that investors are expecting the Bank of England to raise interest rates more aggressively than previously thought.

The Bank of England has already raised interest rates six times this year, and it is widely expected to raise rates again at its next meeting in November. The surge in swap rates suggests that investors are now pricing in a higher probability of further interest rate hikes in the future.

The rise in interest rates is likely to have a negative impact on the economy

Higher interest rates make it more expensive for businesses to borrow money, which can lead to reduced investment and slower economic growth. Higher interest rates also make it more expensive for consumers to borrow money, which can lead to reduced spending and slower economic growth.

The government's Autumn Budget is likely to have a negative impact on the economy in the short term. The tax rises and spending cuts will reduce disposable income and lead to slower economic growth.

However, the government's plan to reduce the deficit is likely to have a positive impact on the economy in the long term

Reducing the deficit will help to reduce the government's borrowing costs and make the UK more attractive to investors. This will lead to lower interest rates and faster economic growth in the long term.

Overall, the government's Autumn Budget is a mixed bag for the economy

The tax rises and spending cuts will have a negative impact on the economy in the short term. However, the government's plan to reduce the deficit is likely to have a positive impact on the economy in the long term.