Markets hate Liz Truss’ plan for the UK. Just look at these graphs
When the UK government, led by new Prime Minister Liz Truss, unveiled its plan to rescue the British economy on Friday, the reaction of investors was immediate: they hated it.
British pound It fell below $1.10 in the middle of the afternoon session, hitting a 37-year low against the dollar.
British government bonds also sold sharply. The yield on Britain’s benchmark 10-year government bond, which moves at opposite rates, jumped by a quarter of a percentage point – a pretty big step in the bond-trading world. This led to higher borrowing costs. British stocks, as measured by the FTSE 100 (UKX) gauge in London, hit their lowest level since March.
Finance Minister Kwasi Quarting said the government will cut personal income taxes and scrap plans to raise business taxes next spring, calling for a “new approach for a new era focused on growth”. Meanwhile, he pledged to press ahead with plans to support energy bills for millions of homes and businesses.
But investors are not convinced that an unconventional approach will actually help the economy, which the Bank of England warned this week is already likely to be in a recession. A number of them described it as a huge gamble.
“It is very unusual for an advanced market currency to weaken at the same time as yields to rise sharply. But that is exactly what has happened since then. [Kwarteng’s] Deutsche Bank strategist George Saravelos said in a note to clients on Friday.
One concern is that it will require a significant increase in government borrowing at a time when interest rates are rising rapidly. The Bank of England on Thursday pushed its key interest rate to its highest level since 2008. This is the seventh central bank rate increase since December.
Tax cuts, though politically popular, can boost demand and raise prices, making the central bank’s job of controlling inflation more difficult.
Speaking to Bloomberg TV, former US Treasury Secretary Larry Summers said the pound could even drop below parity against the dollar for the first time in its history. (Its lowest ever price was just over $1.05 in 1985.)
“I am very sorry to say that, but I think the UK is acting somewhat like emerging markets turning themselves into an offshore market,” Summers said. “Between Brexit, how far the Bank of England has fallen behind the curve, and now these fiscal policies, I think Britain will be remembered for having pursued the worst macroeconomic policies of any large country in a long time.”
The sudden rise of the dollar with the Federal Reserve taking aggressive steps to rein in inflation is adding downward pressure on the British currency.
“Unless something is done to address these financial concerns, or if the economy shows some surprisingly strong growth data, it looks like investors will continue to avoid sterling,” ING’s Antoine Buffet and Chris Turner said in a research note. “We believe the market may be below the price of parity opportunities.”