Kwarteng tells City bosses his economic plan ‘will work’

Kwasi Kwarteng has insisted in a meeting with Britain’s top City bosses on Tuesday that the government’s economic strategy “will work”, despite a market meltdown that sent sterling to record lows a day earlier.

The chancellor issued the assurances during a planned meeting with asset managers, pension funds and insurers from big firms, including Aviva, Legal and General, Royal London, BlackRock, Fidelity and JP Morgan.

While the meeting was meant to drum up excitement for further deregulation, Kwarteng also took the opportunity to try to calm top investors after government bonds yields surged and the pound plunged in reaction to the his tax-cutting mini-budget unveiled on Friday.

“We are confident in our long-term strategy to drive economic growth through tax cuts and supply-side reform,” Kwarteng told bosses, according to a Treasury readout of the meeting. “I’m confident that with our growth plan and the upcoming medium-term fiscal plan – with close cooperation with the Bank [of England] – our approach will work.”

The meeting comes days after the chancellor unveiled sweeping tax cuts in a City-friendly mini-budget, that involved scrapping the EU banker bonus cap and the top 45% rate of income tax, and cutting stamp duty to prop up the housing market. He also trailed “an ambitious package of regulatory reforms” to be unveiled this autumn.

However, the announcement sent the pound and government bonds plunging, as the scale of the tax cuts, which overwhelmingly benefit the better-off, shocked markets and prompted worries about how they would be paid for.

The chancellor assured City bosses and investors on Tuesday that the Treasury was “working closely together” with the Bank of England – which has been under pressure from the government to control inflation linked to surging energy costs related to the war in Ukraine.

Kwarteng, who said last week he would hold bi-weekly meetings with Bailey, was meeting with the governor “every day now”.

Both the chancellor and the financial secretary, Andrew Griffiths, are said to have reiterated support for the independence of financial regulators. “We’re going to keep these institutions as they are but make them more effective and more nimble,” Kwarteng said.

However, that government is still planning to give itself intervention powers through the financial services and markets bill, which would allow it to “amend or revoke” regulations where there are matters of significant public interest”

Related: Why is sterling falling and what does it mean for the rest of the world?

Unusually, the Office for Budget Responsibility, the government’s fiscal watchdog, was not asked to provide forecasts for how the package would affect government borrowing and economic growth in coming years. Kwarteng has requested that the OBR sets out a full forecast alongside the medium-term fiscal plan, on 23 November.

Kwarteng told City bosses that the government was “committed to fiscal discipline and would not reopen the spending review. “We have a medium term fiscal plan coming on 23 November, alongside an OBR forecast. That will be a credible plan to get debt to GDP falling,” he said.

But markets remain in turmoil. Jim Reid, a strategist at Deutsche Bank, said: “When it comes to the last 24 hours, UK assets have remained at the eye of the storm as the negative reaction to the government’s mini-budget on Friday continued. The country’s government bonds were completely routed for a second day.”

Markets are braced for more volatility. The pound hit an all-time low of about $1.035 on Monday morning and is now trading at about $1.08, down 7% this month but up on the day on Tuesday.

UK government borrowing costs are on course for their biggest monthly rise on record, going back to the 1950s, as international faith in Britain is battered by Kwarteng’s borrowing binge to fund tax cuts. The yield on the 10-year benchmark gilt, or government bond, has jumped to 4.1%, from 3.1% before the mini-budget. Yields (the return on a bond) move up when prices go down.

Mortgage rates have also increased and nearly 300 mortgage deals have been pulled, with economists predicting interest rates could rise to 6% by next summer. Banking and insurance stocks have also taken a hammering.