Hunt and markets take gears in a welcome turn


Reality got rid of aesthetics in just a few weeks. Incoming Treasury Secretary Jeremy Hunt wasted no time in putting his predecessor Kwasi Quarting’s tax cuts to the sword. While it is never a good idea to have financial market volatility dictate your economic policies, a full 180 degree switch was required to draw a line under the crisis that has pushed UK government borrowing costs into orbit. But Prime Minister Liz Truss’s authority is in tatters.

The new counselor is the adult in the room. “The most important goal for our country right now is stability,” Hunt said when announcing the tax cuts on Monday. “Governments cannot eliminate volatility in markets, but they can play their part.” Hunt has already met with Bank of England Governor Andrew Bailey, as well as the head of the UK Treasury’s Office of Debt Management. He knows where the priorities lie. Time will tell if that will be enough, but surely this is the sweeping transformation of global markets and institutions such as the International Monetary Fund and credit rating agencies.

Sterling is holding onto the gains it made against the dollar since hitting a record low on September 26, the day Kwarteng unveiled his tax package. In the gold market, yields tumbled after a wild ride, with 10-year record levels back below 4% after hitting 4.6% last week, and 30-year yields also dropping from their highs.

Since his surprise appointment on Friday, Hunt has largely torpedoed all of Truss’ economic plans, even ditching the lowest tax rate cut. “At a time when markets are demanding the right to commit to sustainable public finances, it is not right to borrow to finance this tax cut,” he said. As was widely noted last week, next year corporate tax rates will rise to 25% from 19%. More announcements, particularly on government spending plans, will be made on October 31. There is still work to be done with a gap of about 72 billion pounds ($81 billion), according to speculation about the Office for Budget Responsibility estimates. Necessary to balance the books. The measures announced on Monday have reduced that gap by around £32 billion a year.

The big change revealed on Monday was a more cost-effective approach to the most expensive part of Truss’ growth package, the power price cap. While it remains largely in place this winter, keeping average annual energy costs for a family at around £2,500, from spring it will be recalibrated to benefit the poorest. with natural gas prices Having fallen significantly from the peak, this should reduce the overall cost. This is a moving target for the Office of Budget Responsibility to make a final estimate, but it will go a long way to restore confidence in the government’s approach to its fiscal finances, and thus its borrowing.

The job of liquidation always takes longer than expected and this will certainly be the case as the UK’s reputation has taken a severe blow. A large risk premium appeared not only in government borrowing costs but in all sterling corporate debt. Moreover, the Bank of England will still need to go ahead with another “significant” increase in official interest rates, in the words of chief economist Howe Bell. So there is still more pain for UK consumers and borrowers.

The economy is heading into recession, if not already in recession, and the unnecessarily bleak outlook has been exacerbated by the recent bout of self-harm. As Kate Jukes, currency analyst at Societe Generale SA said, “Gold yields should fall, sterling’s volatility should fade, and all that is left for us will be stagnation, austerity, higher rates and the persistent feeling that this sterling crisis, more than its predecessors, was home-made. It can be avoided.”

However, as former Secretary of Labor Dennis Healy’s “Gaps Act” mandates, “If you find yourself in a hole, stop digging.” Hunt’s quick actions offer what looks like hope for a halt to drilling, even if it’s a long ascent to the surface.

More from Bloomberg Opinion:

The fate of Truss lies in the hands of the new chancellor Hunt: Martin Ivins

• The Bank of England might get lucky: Marcus Ashworth

The UK has much bigger problems than the “nanny country”: Therese Raphael

This column does not necessarily reflect the opinion of the editorial staff or Bloomberg LP and its owners.

Marcus Ashworth is a columnist for Bloomberg Opinion covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.

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