U.K. Markets Still Troubled Despite Finance Minister’s Ouster

 

U.K. Markets Still Troubled Despite Finance Minister’s Ouster

 

Kwasi Kwarteng, the chancellor of the Exchequer, was fired on Friday by Prime Minister Liz Truss in a bid to end weeks of market turmoil.

 

Eshe Nelson

By Eshe Nelson

Oct. 14, 2022

Updated 10:50 a.m. ET

https://www.nytimes.com/2022/10/14/business/uk-markets-kwarteng-truss.html

 

Although Prime Minister Liz Truss of Britain on Friday fired the country’s top economic official in an effort to end the market turmoil that has raged for weeks, the move failed to fully soothe investors: The British pound fell, and recent gains made by government bonds were reversed.

 

Just three weeks ago, Kwasi Kwarteng, the chancellor of the Exchequer, announced a plan to widely cut taxes that sent shock waves through Britain’s financial markets, forced a central bank intervention and drew international criticism. On Friday, Mr. Kwarteng was fired after flying back early from meetings in Washington, having served the second-shortest term as chancellor in Britain’s history, at just 38 days.

 

But British assets still weakened in financial markets on Friday after Ms. Truss gave a short news conference. She announced that she would keep a planned increase in corporation tax rather than drop it.

 

It was the fledgling government’s second major U-turn from the agenda it set out on Sept. 23; on Oct. 3, it scrapped its plan to drop the top rate of income tax. But Ms. Truss told reporters that she was committed to staying on and delivering her general economic agenda.

 

 

“I am absolutely determined to see through what I have promised, to deliver a higher growth, more prosperous United Kingdom, to see us through the storm we face,” she said.

 

Markets had already moved in response to speculation on Thursday that Ms. Truss would backtrack on some of the tax cuts, said Jane Foley, a strategist at Rabobank, and there was only a “teeny little” response to the dismissal of Mr. Kwarteng on Friday.

 

The pound was more than 1 percent weaker against the dollar on Friday, after rising more than 2 percent the day before.

 

The British currency rose slightly after Ms. Truss announced that she had replaced Mr. Kwarteng with Jeremy Hunt as chancellor; he will be the fourth chancellor this year. Mr. Hunt was a supporter of Rishi Sunak, another former chancellor and the last contender against Ms. Truss in the recent race for the Conservative Party leadership. But then the pound weakened again after Ms. Truss’s news conference.

 

The yields on government bonds, an indicator of government borrowing costs, were rising, with 10-year yields at 4.2 percent, after falling to as low as 3.9 percent earlier in the day.

 

While signs of a retreat by the government have offered some relief to markets this week, it leaves the government’s economic agenda in tatters and Britain without a clear path ahead while inflation is at its highest level in four decades and household budgets are squeezed by rising energy bills, higher mortgage rates and other rising costs.

 

Data published this week showed that the British economy unexpectedly shrank in August, adding to expectations that Britain is headed for a recession.

 

“We might get the U-turns, but what else?” Ms. Foley said. “What can any chancellor now do to dig the U.K. economy out of the hole that it’s in?”

 

The pound was trading below $1.12, lower than where it was before the government’s policy statement on Sept. 23. Bond yields were still significantly higher then they were before the statement.

 

The pound is still a vulnerable currency, Ms. Foley said. “Even though we may have pulled back from the abyss,” she added, “we’re not in a positive position.”

 

Eshe Nelson is a reporter in London, where she writes about companies, the British economy and finance. @eshelouise