It is always risky for ministers to cite moves in financial markets as evidence of a policy being well-received.
Fickle traders can turn at a moment’s notice, and any number of factors can affect how much the dollar is worth compared to the pound.
But sometimes the opportunity is just too tempting.
Chris Philp, a Treasury minister, seized on a brief rise in the pound while the Chancellor was giving his mini-budget to declare it was “great to see sterling strengthening on the back of the new UK Growth Plan”.
Markets soon betrayed him. By the end of the day, sterling had slumped from $1.125 to below $1.09. On Monday morning it crashed below $1.04.
At the same time the unfortunate minister was tweeting his thoughts on the currency, analysts on the other side of London in the Bank of England were watching a very different market with growing alarm.
Bond markets - the crucial forum where the Government funds itself, borrowing from investors who then buy and sell the debt, known as gilts, between themselves - were heading south, and fast.
The staff who were watching the market plunge before their eyes are not based in the Bank's famous Threadneedle Street head office, with its fortress-like facade and giant bronze doors guarding the gold beneath London’s streets.
Instead, they are financial stability experts, based in a less glamorous office a few hundred yards to the north, on Moorgate. They were brought in when the Bank was given extra responsibilities after the financial crisis in an effort to ensure a credit crunch could never happen again.
But ructions in the bond market in the aftermath of the mini-Budget were so significant that word of the trouble quickly travelled from Moorgate to the Bank.
Andrew Bailey intervenes
With a crunch threatening the stability of pension funds, officials including Andrew Bailey, the Governor, and Sir Jon Cunliffe, his Deputy Governor for financial stability, knew they had to act.
The scene was set for an emergency £65bn rescue to stop a run on bonds which risked, in the words of Mark Carney, a “cascade” through financial markets.
Just how did the mini-Budget trigger such chaos?
Liz Truss had promised a radical new approach to Government from the start of her leadership campaign.
Tax cuts were on the way, she made clear from the very first leadership debate against Rishi Sunak. The long battle for Number 10 took place against a backdrop of mounting living costs and an impending energy bills disaster, so big spending was also in the offing.
Less eye-catchingly, but no less importantly, interest rates were steadily rising in bond markets, in the UK and around the world.
On becoming Prime Minister, Truss was straight out of the blocks announcing a gigantic energy bills subsidy in her first week in charge, limiting the average household’s bill to £2,500 per year - a policy with literally no limit and not even an estimate of the cost to the public purse.
That would require more borrowing and it was was in this context that bond yields were creeping up, as investors grew increasingly nervous about how much governments around the world were spending to tackle the energy crisis.
Chancellor fails to reassure financiers
Given this issue, the Chancellor has been accused of failing to do enough to reassure the financiers before his mini-Budget.
The corporate reaction to the package had been gamed out and was met with two thumbs up by most business groups. So too the public angle. Polling suggested the mammoth energy bills freeze and National Insurance cut was loved by voters. Scrapping the tax top rate was more of a gamble but one Truss and Kwarteng believed was worth taking.
But what about how traders would react? The pound was already sinking and rates on gilts were creeping up as the announcement approached. The Government needed to show it is a safe guardian of investors’ money, rather than a reckless borrower that take cash for granted.
A senior hedge-funder was amazed that they had not been approached by Treasury folk for market intelligence before the fiscal statement.
Gerard Lyons, the informal adviser to the Truss campaign and one of her most prominent economic backers, went public saying he had warned the Government that markets could get spooked by their package.
Top Treasury sacking
If the Treasury did make a major effort to understand and calm markets beforehand, then an even more damning conclusion looms - they spectacularly misjudged the mood.
Those who worked on previous Budgets point to the Tom Scholar-sized hole at the top of the Treasury as another possible factor in the miscalculation.
Sir Tom had been the permanent secretary in Whitehall’s most important government department since 2016 before being summarily dispatched by Kwarteng.
The sacking was made just hours after the Chancellor was appointed, gleefully briefed by aides as proof of delivery on a promise to overturn 30 years of Treasury orthodoxy.
His experienced number two, Sir Charles Roxborough, left in the summer.
How Tories would have prayed for a tad more orthodoxy as markets fell off a cliff.
In Sir Tom’s place have been two acting permanent secretaries and long-time Treasury insiders - Cat Little and Beth Russell. Neither has led a department before, let alone through waters as treacherous as this.
Is there a feeling some expertise is lacking? Certainly Kwarteng took time out of his manic week to try and plug the gap.
Candidates were interviewed on Thursday. Five permanent secretaries are in the running: Tamara Finkelstein, Antonia Romeo, James Bowler, Peter Schofield, and Jeremy Pocklington.
A decision is expected this weekend. Sir Tom himself has maintained a public silence since his sacking.
Veterans of past Budgets and crises saw Sir Tom, and particularly Sir Charles, as vital conduits to the City, their fingers on the pulse of the markets. They are far from the Treasury’s only links to the world of finance, but losing well-connected officials at a key moment raised the risk of missteps.
One subsequent misstep was a failure to appreciate the importance of independent forecasts from the Office for Budget Responsibility.
The institution, established by George Osborne in 2010 to analyse budgets, was told its services would not be required on this occasion.
Usually requiring 10 weeks to produce a full report, Richard Hughes, the OBR’s chairman, proposed a truncated version of the usual 250-page tome for the short-notice statement.
Hughes offered a quickfire version which would be “shorter”, “less detailed”, and potentially subject to “greater uncertainty around forecasts” than normal.
It was decided to wait until later in the year. The Treasury would rely on its own numbers to forecast the costs of the policies. Market sources point to this as a key error.
“The Treasury’s line is that they are offering help on energy, which is true, but normally they would explain how they are going to fund it,” says one financial source.
In a radio interview Mark Carney, Bailey’s predecessor, called this an “undercutting” of critical institutions - something markets have also seen in the treatment of the civil service and of the Bank itself.
The Old Lady of Threadneedle Street became a punchbag in the leadership campaign, though since Kwarteng took the reins at Number 11 it is understood he has established better-than-expected relations with Bailey, and publicly guaranteed its independence.
Meanwhile preparations for Friday 23rd’s speech continued.
Those looking for a “rabbit” in the statement received hints on the Tuesday night that a stamp duty cut was in the offing.
But few other crumbs were dropped about the content of the upcoming announcement. Insiders saw this as an unusually “secure” fiscal statement, with relatively few leaks. Paradoxically that may have contributed to later turmoil as it left more surprises for the day itself.
By Wednesday evening, global markets’ attention was elsewhere.
Jerome Powell, chairman of the US Federal Reserve, announced the central bank’s third consecutive 0.75 percentage point rate rise, taking its interest rate to 3.25pc. More increases are on the way, he said.
These rapid jumps have pushed up the dollar and forced down other currencies this year, including the pound.
Bank raises rates
The Bank of England followed on Thursday, raising its rate 0.5 percentage points, to 2.25pc. This was less than the 0.75 percentage point many investors had been expecting.
The Fed was pulling ahead of the Bank, so the pound weakened again.
Clare Lombardelli, a senior Treasury official, attends the Monetary Policy Committee’s meetings. But her job is not to brief the MPC on the precise details of the upcoming announcements, and the central bankers are supposed to base their forecasts and decisions only on announced Government policies.
So the next day’s events were as surprising to Threadneedle Street as to the rest of the Square Mile and the nation at large.
Friday. The moment had arrived. Kwasi Kwarteng rose in the Chamber to present his plans.
In just 25 minutes, the Chancellor reeled off a remarkable list of new policies. The length of his speech suggested a mini-Budget. The content did not.
Stamp duty was slashed with a higher threshold. The planned 1p cut to the basic rate of income tax was brought forward. The 45p rate for those earning over £150,000 was scrapped altogether. Paul Johnson at the Institute for Fiscal Studies called it the biggest tax-cutting budget in half a century.
The Chancellor promised a new age.
“We have promised to prioritise growth. We have promised a new approach for a new era,” Kwarteng said.
“We have promised to release the enormous potential of this country. Our growth plan has delivered all those promises and more.”
Tory MPs cheered. Labour jeered. And outside the Commons, a rout was taking hold in markets.
Traders were blindsided by the extra tax cuts. Without scrutiny or full numbers from the OBR, the pound, bonds and stocks took fright.
“We had absolutely zero warning,” says a source at one fund manager.
Bond traders saw the mini-Budget as reckless when markets had been falling for months and investors were still playing catch-up with the extent of borrowing to cover the energy package.
Extra surprise borrowing forced a painful reckoning in debt markets.
The Bank of England had been aware of the risks of a crunch in long-dated bond markets for years. It first flagged the danger publicly back in November 2018. Regulators on Moorgate have been monitoring the situation intensively for months.
When more investors are selling bonds than buying them, the interest rate, or yield, the Government needs to pay to borrow rises.
The yield on the 30-year gilt, which is so important to pension funds, has been climbing all year.
From December’s 0.8pc it more than doubled to 1.8pc in March. By the start of September it had doubled again to 3.2pc.
After the mini-budget this crucial borrowing cost surged again.
Officials homed in on the crunch point immediately and worked over the weekend lest an emergency intervention be needed.
Political attempts to defend the mini-Budget, and the pound with it, foundered.
Over the weekend, the Chancellor gave no indication or remorse or caution, instead promising “more to come” on tax cuts.
Kwasi Kwarteng’s demeanour is one of self-assurance. Supporters praise it as “calm” when others could lose their head; critics see a politically dangerous nonchalance.
The pound slumped further in Asian markets, as the prospect of yet-more unfunded borrowing was too much to bear for investors already nervous because of the lack of any independent forecasts.
An Evening Standard report that Kwarteng was overhead in the immediate aftermath of the Brexit vote outside the Groucho Club saying “who cares if Sterling crashes? It will come back up again,” was disputed this week.
On Monday morning, the Chancellor and the Prime Minister met in Downing Street.
Their relationship is a close one. Truss wanted to eradicate the stand-offs that flared so frequently between Boris Johnson’s Number 10 and Rishi Sunak’s Number 11.
To do so, she hand-picked a Tory MP who she trusted implicitly and agreed with in ideology - an approach she adopted with appointments to other key economic delivery departments.
But in that meeting, there was a discussion about different options - and possibly differing opinions.
The pound hit a new low of just under $1.04 on Monday, below anything suffered in the credit crunch or pandemic. The Bank wanted to speak publicly. Should the Treasury do so too?
In the end, it did. Number 11 issued a statement promising a plan to get debt falling, a raft of supply side reforms and - in the first public confirmation - to keep spending capped at current levels.
The Bank of England, just three days after what would normally have been considered to be a significant rate rise, was forced to rule out an emergency rate rise. It published a statement seeking to exude a sense of normality and stability. Bailey promised a “full assessment at [the MPC’s] next scheduled meeting”.
On Tuesday Huw Pill, the Bank’s chief economist, was headline billing at a financial conference at a luxury hotel in London’s Marylebone. Speaking alongside counterparts from the European Central Bank and the Federal Reserve, he was the star attraction given turmoil in markets. The moderator felt obliged to request the audience ask only questions for the eurozone and American panellists for a spell, to give Pill a break.
He held the line on rates. The Bank was not going to panic and would not be forced into a premature decision on interest rates just because of a day or two of choppy financial markets.
On Tuesday night, the message from Kwarteng was one of reassurance.
He joined a conference call with around 90 Tory MPs to answer questions about the mini-Budget and, invariably, the fallout that had followed.
He was joined by Philp, the energetic new Chief Secretary to the Treasury, and Mark Fletcher, Kwarteng’s new parliamentary private secretary. Between them they have less than 60 days experience of the Treasury.
According to one Tory MP with ministerial experience who was on the call, Kwarteng seemed relaxed about the situation.
The MP recalled: “He basically said that people were pissed off in the City that they didn’t know the measures in the mini-Budget were coming.
“He argued now the volatility will work through, it will settle down and it will be okay. It was just quite casual and very politically not tuned into the concerns.”
The Chancellor told colleagues economic growth would be back by the middle of next year and then perform even better in 2024, the expected date for the next general election.
Many Tories listening on were despairing, but not all. One asked why Kwarteng had not gone even further on tax cuts, raising the income tax threshold and slashing VAT.
The Chancellor responded by saying there were fiscal “restraints”, leading to raised eyebrows given he had just asked for an extra £72bn in borrowing in six months to cover whopping tax cuts.
All the while, bond yields were rising.
Just before the close of the market, the borrowing cost on those 30-year gilts hit 5pc.
Inside the Bank of England, it was clear drastic action was required: part of the market had become trapped in a run which had to be broken.
As officials revealed the next day, a critical part of the pensions market had been taken by surprise by the extent of the fall in markets, forcing managers to dump bonds. This in turn forced bond prices down - and so borrowing costs up - even more, in a vicious cycle.
Funds selling bonds risked running out of buyers. Demand for British Government debt in that part of the market had evaporated.
It was down to the Bank to stop it.
Financial stability staff, including top policymakers, prepared for an all-nighter. Come Wednesday morning, officials were putting the finishing touches to their £65bn rescue plan.
For half an hour the Chancellor and Bailey held a video call, the Governor revealing what the public did not yet know - pension funds were teetering. Action was needed, and now. Kwarteng signed off on the scheme, giving the Treasury’s financial backing in the form of an indemnity.
At 11 o’clock, the bailout was launched.
The Bank would buy bonds of 20-years or more “on whatever scale is necessary” for 13 market days to “restore orderly market conditions”.
On the face of it, this worked. Bond yields dropped sharply. The Bank bought time for pension funds. The most acute stage of the crisis was over.
At the same time as the Financial Policy Committee was giving the final thumbs up to the rescue, Kwarteng was speaking to investment bank bosses, seeking to reassure international financiers the situation was in hand.
The Chancellor told the high-powered executives about his plans to save consumers from overwhelming bills, turbocharge growth and - on November 23 - set out borrowing targets and full OBR forecasts.
City sources say the message is the right one, but see no reason for the delay.
“It comes down to getting something done,” says an insider.
“We do not have time to wait. We have got two weeks of bond-buying from the Bank of England, which ends way short of when Kwasi is thinking of getting his OBR data out.”
But after meeting with Richard Hughes, the OBR’s boss, on Friday, Truss and Kwarteng insisted they would not be rushed.
The threat now is to Truss’s entire agenda. Pressure is growing from within the Conservative party.
Rishi Sunak’s supporters feel vindicated. Time and time again throughout the summer, the former Chancellor voiced his core message: Big tax cuts now would be economically foolish.
What lay behind the certainty inflation would soar and the markets tumble if major unfunded tax cuts were announced? Some secret market intel perhaps?
Not so, according to Mel Stride, the Tory chairman of the Treasury Select Committee who was in charge of securing MP votes for Sunak in the first half of the Tory leadership race.
Stride told The Telegraph: “It is just basic economics. If you go for large scale, unfunded tax cuts at a time of inflationary pressures, tight labour markets and an economy facing capacity constraints you’ll get more inflation and higher interest rates.
“That’s not to disagree with the argument that low taxes are desirable or even that through time you can’t use supply side reforms to grow the economy to fund them. But the sequencing is critical.
“Margaret Thatcher understood this. She got on top of inflation, delivered supply side reforms, and then later Nigel Lawson delivered significant tax cuts. It just seemed to me and many others that this was all rather obvious from an economic point of view.”
In public, the Sunak campaign is remaining out of the limelight. This was always the plan - the team was devastated by his defeat and wanted to give Truss space to govern.
Sunak will not be attending Tory conference this weekend. Oliver Dowden, his campaign chairman, is not giving interviews. Many of his backers are doing likewise.
But could there be a phoenix-like return for the man considered economically literate, who steered the UK through Covid with a steady hand and public applause, if things deteriorate? The whispers have begun.
As for the Chancellor, Kwarteng has kept his cool despite the intense financial and political pressure, according to Treasury colleagues.
“Kwasi is always calm. Always,” said one insider.
Yet others have dire predictions. As one minister put it: “Kwasi is toast.”