Prime Minister Liz Truss of the U.K. inherited an economy in shambles, with a record high inflation rate of 10 percent and a falling British pound, after the unceremonious exit of Boris Johnson, whose last few months as Prime Minister was filled with scandals including PartyGate. In what was called a mini-budget, Finance Minister Kwasi Kwarteng said that the new Conservative government would bring about a cut in taxes as well as cancel plans that would have raised business taxes in spring 2023. The markets did not respond favorably.
On Friday close, the GBP received another pounding as it fell 3.6 percent against the dollar. Some analysts feel that the dollar and pound could be at par, soon. The all time low of the GBP was in 1985, when it was slightly above $1.05. The pound has seen a 27 percent fall since 2016.
There also was a huge selloff of UK government bond. It rose by a quarter percentage point, which is a huge move in bond trading. This in turn led to an increase in borrowing costs. The FTSE 100 (UKX) plunged to its lowest level, in London, since March.
Earlier on Thursday, the Bank of England increased its key rate for the seventh time, since December 2021. The current rate is its highest since 2008.
The conservative government under Truss has not only lowered tax rates but is also planning to subsidize the energy bills of its citizens and this includes millions of households as well as businesses. These subsidies will be offset with additional borrowing.
Lowering taxes may gain the beleaguered government some brownie points from its citizens but it could also see prices shooting up. This, in turn, would make it more difficult for the Bank of England to curb galloping inflation.
This unconventional approach, dubbed as Trussonomics, has not found favor with the markets as some investors call it a “huge gamble.” The Bank of England says that the British economy is already, most likely in a recession.
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