The race to become Britain’s next prime minister, and the fifth since the Tories took power in 2010, has yet to see anyone announce their intention to stand for election.
Dan Kitwood | Getty Images News | Getty Images
LONDON — British Prime Minister Liz Truss was in office only 44 days before announcing her resignation on Thursday. His time as leader may have been short, but the impact of his tenure on the UK economy has been enormous.
Truss and his former finance minister, Kwasi Kwarteng, announced a so-called mini-budget on September 23, including unfunded tax cuts and an expensive energy guarantee, and markets were quick to react.
The full force of Truss’s policies ricocheted off the British economy, causing a falling pound, bumpy government bonds and growing speculation in the Bank of England’s interest rate.
Here are three charts showing how the markets fared during Truss’ brief stay at 10 Downing Street.
A sterling saga
Truss won the Tory leadership race on the promise of a low-tax, high-growth economy, but the pound plummeted because of his spending plans.
The pound fell to a record low to trade around $1.03 on September 25 and, along with other fiscal indicators, prompted the IMF to issue a warning about the dangers of ‘large and untargeted fiscal packages’ .
The pound rallied amid growing speculation. Truss was close to reversing his mini-budget policies, before cutting gains as the Prime Minister sought to appease markets.
The pound appeared buoyant after Truss’s resignation announcement on Thursday. However, it fell as markets considered the political uncertainty that accompanies another leadership election.
Peter Toogood, chief investment officer at Embark Group, said he expected the pound to remain weak.
“We have a budget deficit, we have a current account deficit, and we are continually at the behest of the kindness of strangers, and have been for many decades, in practice,” Toogood told “Squawk Box Europe” on Friday. from CNBC.
“So it’s not a good scenario in that sense, but it seems like the markets kind of ignore it and see it to some extent,” he said.
Skyrocketing Gilding Yields
Yields on UK government bonds – known as gilts – soared after the government announced its mini budget, meaning prices crashed as bond yields move in the opposite direction prices.
Yields on 30-year gilts hit a 20-year high on September 27. Meanwhile, 10- and 2-year yields rose on the announcement of further tax cuts financed by government borrowing.
The Bank of England intervened on September 28 to stabilize the markets. The intervention came at a time when bond yields were on course for their biggest monthly rise since at least 1957 as investors fled UK fixed income markets.
A two-week buying program of long-term bonds followed, and on October 10, new measures were announced to ensure an “orderly end” to its buying program.
Meanwhile, fears of a housing market crash grew as UK banks withdrew mortgage deals and lending rates soared.
Yields fell when new finance minister Jeremy Hunt issued an emergency declaration on Oct. 17, scrapping the majority of the mini-budget that had thrown markets into turmoil.
Gilt yields fell as Liz Truss gave her resignation speech, but flattened out later in the day.
Eyes on the interest rate
The Bank of England raised interest rates from 1.75% to 2.25% on September 22, its seventh consecutive hike, and investors are now waiting to see what the central bank will do next.
The Bank said it would “not hesitate” to raise rates further if necessary, but expectations about when – and where – rates will peak have changed in recent weeks.
On Oct. 3, the interest rate was expected to peak at 5.62% in May 2023, according to data from FactSet and Goldman Sachs.
The latest forecasts suggest that the interest rate should now peak at 5.08% in October 2023. A decline to 4.6% is then expected by October 2024, before the rate begins to rise steadily again.