Kwasi Kwarteng’s mini-budget has gone down badly in the financial markets. Mortgage rates have risen and the Bank of England has been forced to step in to halt a run on pension funds since the chancellor announced his policies on Friday.
The picture is complex and fast-moving, and the jargon used to explain it leaves much of the public feeling more confused. Here we examine 10 of those frequently bandied-around financial terms and concepts and explain what they actually mean.
This is the job of the Bank of England, which since 1997 has had the statutory task of hitting the inflation target set by the government – currently 2%. The Bank’s nine-member monetary policy committee (MPC) has two main tools at its disposal to achieve this: interest rates and the buying or selling of government and corporate bonds.
The Treasury is responsible for fiscal policy, which involves taxation, public spending and the relationship between the two. Kwarteng’s mini-budget represented a fiscal easing, because the chancellor announced plans for tax cuts not matched by spending cuts. Markets expect the budget deficit – the gap between what the government spends and its tax revenues – to increase as a result. Government debt is the sum of annual budget deficits (and the less frequent surpluses) over time.
In the UK these are known as gilts, and are a way the state borrows to finance its spending. The fact that governments guarantee to pay investors back means they are traditionally seen as low risk. Bonds mature over different timescales, including one year, five years, 10 years and 30 years.
Most bonds are issued at a fixed interest rate and the yield is the return on the capital invested. When the Bank of England cuts interest rates, the fixed
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