Here are this week’s highlights in the UK economy.
Sterling stalls as the UK government faces further turmoil. The pound fell to $1.1166, a drop of -1.5% from the previous day. The market stumbled after the government announced Kwarteng’s resignation.
Jeremy Hunt replaces Kwasi Kwarteng. After six weeks in office, Kwarteng confirmed his resignation in a letter after PM Liz Truss requested him to step aside. According to Bloomberg, he is the shortest-serving chancellor to leave the post while alive, in almost two centuries.
Truss U-turns another tax plan. The PM confirmed that she will scrap the planned corporation tax freeze. However, no other reversals will be made, according to Truss. We will see.
BoE ends gilt-buying programme. The bond purchases expired on Friday after the Bank of England (BoE) Governor Andrew Bailey made it clear days before that he will not be extending the intervention.
Interest rates are likely to increase next month. Huw Pill, BoE’s chief economist, hinted of a further interest rate hike this November as the Monetary Policy Committee convenes again.
This week’s political turmoil is enough to make markets volatile again next week. The gilt market will continue to be tested as the daily bond purchases of the BoE have already expired, and we’re just a few days away from another interest rate hike by the central bank. Reports indicate that even Truss’ allies are discontented with her performance since she stepped into office. She was supportive of Kwarteng after the mini-budget speech, but the pressure to salvage the economy has meant drastic measures to calm the public. The uncertainty and confusion is what causes the markets to react negatively.
We don’t expect the market to calm down anytime soon. Her plans of abandoning the corporation tax freeze will do nothing more than inspire a very short-lived recovery. Restoring investor confidence at this time demands more than sacking Kwarteng. In fact, we believe that his resignation will do more harm than good. Finanze® CEO Alastair Hoyne states, “Leaders need to be steadfast and hold to their ideals, not chopping and changing because of a bit of dissent. The markets were starting to calm down and now we turned around and sailed right back into the storm. The plan was sound, invest in those that strengthen the economy so that they in turn support everyone else. It just goes to show that the whole hasty decision to remove the last PM was a rushed, ill-conceived idea as they are just as upset with the latest one they've elected.”
UK mortgage holders must therefore prepare for another round of rate surges after this week’s market mayhem. As if the current cost-of-living crisis wasn’t enough, expect that the gilt market will have rising yields, which will push mortgage rates for fixed and variable loans upwards as well. The Resolution Foundation expects that between now and at the end of 2024, UK mortgage holders will incur a £5,100 increase in their average mortgage costs, which will cut net incomes by a significant portion.
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