UK support for Reaganomics gets approval from markets
Truss has now set the country on an economic path in stark contrast to most, if not all, of the major global economies.
Hannah Mckay | Reuters
LONDON – New UK Prime Minister Liz Truss may have talked a lot about “trickle-down economics” during her campaign this summer, but no one could have predicted it. A series of tax cuts unfolded just weeks after her tenure in Downing Street.
Considered a “small budget” by her Finance Minister Kwasi Kwarteng, Friday’s fiscal announcement is anything but a tax cut. not seen in the UK since 1972.
Truss – whose policy stance “Trussonomics” has been likened to her political idols Ronald Reagan and Margaret Thatcher – has now put the country on an economic path in stark contrast to most, if not all, of the major global economies as rising inflation and the cost-of-living crisis spill over into Europe.
Some of her supporters even see it as an economic and political gamble with Truss yet to face British electors in a national election – unlike his predecessor Boris Johnson. hers.
Market players immediately predicted that Britain would have to scale up its bond issuance and dramatically increase debt to pay for the cuts – not typical of Conservative governments that taxed low first. this.
The UK bond market fell on hard times on Friday as investors shunned the country’s assets. Yields (inversely proportional to price) on the gold-plated five-year forward rose half a percentage point – which Reuters reported was the biggest one-day gain since at least 1991.
And with broken bonds, pound also went into free fall after hitting a 37-year low compared to dollar in recent weeks. It ended Friday down nearly 3.6% against the greenback. For the week, it lost 5% and is now down 27% since just before the 2016 Brexit vote.
Wall Street banks are now seriously considering breaking the US dollar parity – a first in history – and many commentators have likened the pound sterling to an emergency market currency.
The left-wing Guardian called it a “rich budget” on its front page on Saturday, while The Times called it a “big tax gamble”. The right-wing Daily Mail called it the “real Tory budget” while Kwarteng himself called it a “very good day for the UK”, refusing to comment on the currency move.
Investors are worried that the UK Treasury has now effectively committed to open loans for these tax cuts and the Central Bank, ING analysts said in a research note. Britain will have to respond with more aggressive rate hikes.
“For us, the magnitude of the spike in gilt production has more to do with a market that has become dysfunctional,” Antoine Bouvet, ING’s Global Head of Markets, said in the note.
“Several indicators … suggest liquidity is drying up and market activity is depressed. A signal from the BOE that it is willing to suspend gold-plated sales will go a long way to restoring confidence. market, especially if it wants to maximize its chances of combating inflation with conventional tools like raising interest rates. [quantitative tightening] In short, the battle is not a battle worth fighting for the BOE,” they added, referring to the Bank’s move to normalize its balance sheet after years of stimulus.
ING also notes that the UK’s long-term sovereign outlook is currently stabilizing with the three major rating agencies, but “risks could turn to a negative outlook” as they are reviewed (date). October 21 and December 9).
Meanwhile, Deutsche Bank analysts said “the price of easy fiscal policy has been adopted by the market” on Friday.
“[Friday’s] Sanjay Raja, senior economist at Deutsche Bank, said in a research note there could be a market gap.
“A plan for sustainable public finance will be necessary but not sufficient for markets to regain confidence in a large double-deficit economy. [the U.K.’s fiscal and current account balances]”he added.
“Importantly, with fiscal policy shifting to easier territory, it may be up to the Bank of England to stabilize the economy, with the MPC [Monetary Policy Committee] Much work remains to be done to close the gap between expansionary fiscal policy and tight monetary policy. “
—Karen Gilchrist of CNBC contributed to this article.