The value of the pound and British bonds have plummeted since Friday, when Finance Minister Kwasi Kwarteng laid out his plans to boost economic growth, forcing the Bank of England to signal a “significant” rise in rates in the future.
Mid-morning Wednesday in London, the pound was down 0.4% at $1.0688, the 30-year government bond yield was above 5% and hit a 20-year high, and fixed income strategists warned that markets were approaching the impossibility of trading due to volatility.
Raymond Thomas Dalio, co-chief investment officer of the world’s largest hedge fund, Bridgewater Associates, said he couldn’t believe the mistakes the government of new Prime Minister Liz Truss was making.
“The panic selling that is being seen now and that is leading to the fall in UK bonds, currency and financial assets is due to the recognition that the large supply of debt that the government will have to sell is too much to bear.” demand,” he said on Twitter.
Julian Jessop, an economist who informally advised Truss during his leadership campaign, said the economy was at risk of a “catastrophic spiral.”
The latest crisis to hit the British state has been triggered by Kwarteng’s plans to implement deep tax cuts and deregulation to lift the economy out of a long period of stagnation, seen as a return to “Thatcherite” and “Reaganomist” doctrines. from the eighties.
The IMF said the proposals, which took the pound to a record low of $1.0327 on Monday, would add to a credibility crisis after the government cut taxes and increased borrowing just as the Bank of England raised interest rates to deal with rising inflation.
“Given elevated inflationary pressures in many countries, including the UK, we do not recommend large, untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work against monetary policy,” an IMF spokesman said. .
The IMF is of symbolic importance in British politics: its rescue in 1976, following a balance-of-payments crisis, forced massive spending cuts and has long been regarded as a humiliating low point in the modern economic history of the UK. country.
Reassess measures
In a strong statement, Moody’s said large unfunded tax cuts were “credit negative” for the UK, with the risk of a structural rise in funding costs that could weaken the economy.
Stuart Rose, a business veteran who has run many of the country’s biggest retailers, said the new bout of uncertainty would force companies to stop investing.
“It’s not going to stimulate things today,” he told BBC Radio, adding that companies would wait to see what happens next. “Especially in the capital markets, when debt is going up in price and debt availability is really tight.”
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Kwarteng, an economic historian who was finance minister for two years, has responded to criticism by insisting that tax cuts for the wealthiest, along with support for energy prices, are the only way to revive economic growth.
The IMF said its November 23 fiscal plan would provide an “early opportunity for the UK government to consider ways to provide more targeted support and to reassess fiscal measures, especially those that benefit high incomes.”
Britain’s Treasury Department said the November announcement would detail the government’s plans to reduce debt in the medium term.
On Tuesday, Bank of England chief economist Huw Pill said the central bank was likely to make a “significant” rate hike when it meets in November, adding that the turmoil in financial markets would have a big impact on the economy and would be taken into account in its future forecasts.
“It’s hard not to conclude that this will require a significant monetary policy response,” Pill said at CEPR’s Barclays Monetary Policy Forum.
Source: Ambito
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