While the whole world may be grappling with inflationary pressure and a looming global recession, there’s no doubt that the UK was unmatched in terms of its ability to make its own situation considerably worse.
At the heart of this was the disastrous election of Liz Truss and her ill-feted mini budget, which triggered the collapse of the pound (which fell to an all-time low against the US Dollar) and prompted the Bank of England (BoE) to set aside £65 billion to help bail out the bonds and pensions markets.
We’ll explore the impact of the mini budget below, while asking how this affected the UK markets in closer detail.
How Did the Mini Budget Affect the UK Markets?
The mini budget was the joint work of Liz Truss and her Chancellor Kwasi Kwarteng (despite both distancing themselves from the policy), while it included a staggering £45 billion in unfunded tax cuts.
This included the controversial scrapping of the 45p tax rate for higher earners and a 1% tax reduction across the board, while it was widely condemned by economists before it was even released.
Unsurprisingly, the markets reacted with horror to the policy following its announcement, as the pound slumped to record lows against the greenback while government borrowing (and mortgage rates) soared. Although the equity markets haven’t depreciated by the same extent, gains have stagnated somewhat in line with reduced growth, this makes wealth management all the more complicated for domestic and international investors.
Immediately following the Chancellor’s statement (which went even further than Truss’s initial plans and factored in a reduction in the basic rate of tax a year earlier than anticipated), the government’s long-term borrowing costs rose sharply, exacerbated by the BoE’s aggressive base rate hikes aimed at curbing inflation.
To further compound matters, the mini budget hadn’t been accompanied by an objective of its plans by the government’s official spending watchdog (the Office for Budget for Responsibility), tipping the markets over the edge as the macroeconomic climate collapsed.
The Effects on Investors and the International Markets – Can Sunak Have an Impact?
We’ve already touched on the collapse of the pound against the dollar (and it’s decline when compared with Euro and similar major currencies), but the gilt market also spun out of control as the five-year yield for this market surged at one point to 4.047% (which is the highest level since October 2008).
Regardless, the reaction of the market is underpinned by the government’s attempt to loosen fiscal policy at a time when the BoE was engaged in monetary tightening measures such as base rate hikes. This has caused immense confusion and volatility, and Rishi Sunak’s primary job is to work in tandem with the BoE to lower inflation and boost economic growth.
This will prove a difficult challenge, but a focus on reducing borrowing and driving down inflation over time will help to restore a semblance of stability to the market.