Main menu


3 charts showing market turmoil during UK Prime Minister Truss' tenure

featured image

The race to become Britain’s next prime minister, and the fifth since the Conservatives took power in 2010, has yet to see anyone announce their intention to run.

Dan Kitwood | Getty Images News | Getty Pictures

LONDON British Prime Minister Liz Truss only served 44 days before announcing her resignation on Thursday. His time as leader may have been brief, but the impact his tenure had on the British economy was enormous.

Truss and former Finance Minister Kwasi Kwarteng announced the so-called mini-budget on September 23, including unfunded tax cuts and an expensive energy guarantee, and markets were quick to respond.

The full force of Truss’s policies has wreaked havoc on the UK economy, causing the pound to fall, government bonds to fluctuate and increased speculation over the Bank of England’s interest rate.

Here are three charts that show how markets have behaved in Truss’ short stint on Downing Street 10.

A Sterling legend

Truss won the Conservative leadership contest with the promise of a low-tax, high-growth economy, but the pound fell into free fall after spending plans.

The pound fell to a record low to trade around $1.03 on Sept. 25 and along with other financial indicators prompted the IMF to issue a warning about the dangers of “large and untargeted fiscal packages”.

Sterling rose amid speculation that Truss is ready to make a U-turn on mini-budget policies and that the prime minister is ready to slash earnings as he tries to calm markets.

Sterling rose on news that Truss resigned on Thursday. However, markets fell as they pondered the political uncertainty that comes with another leadership election.

Embark Group’s chief investment officer, Peter Toogood, said he expects sterling to remain weak.

“We have a fiscal deficit, we have a current account deficit, and we are constantly at the disposal of foreign courtesy, and in practice we have been so for decades,” Toogood told CNBC’s “Squawk Box Europe” on Friday.

“So it’s not a good scenario in that sense, but markets seem to ignore it and see it directly to some degree,” he said.

Rising gilded yield

The yield on UK government bonds – known as gilding – rose after the government announced its mini-budget, meaning that prices fell as bond yields moved against prices.

30-year gilding returns hit a 20-year high on September 27. On the other hand, 10-year and 2-year yields rose with the news of new tax cuts financed by government borrowing.

The Bank of England stepped in on September 28 to stabilize the markets. The intervention came at a time when bond yields were on track to post their sharpest monthly rise since at least 1957, as investors fled British fixed income markets.

This was followed by a two-week buying schedule for long-term bonds, and on October 10, further measures were announced to ensure the “orderly expiration” of the purchase plan.

Meanwhile, fears of a housing market collapse have grown as UK banks withdraw mortgage deals and lending rates skyrocketed.

Yields fell as the new Finance Minister Jeremy Hunt threw away most of the mini-budget that had thrown the markets into turmoil with his emergency statement on October 17.

Gilded yields fell as Liz Truss made her resignation speech, but flattened out later in the day.

eyes on interest

The Bank of England raised interest rates from 1.75% to 2.25% on September 22, its seventh consecutive rise, and investors are now waiting to see the central bank’s next move.

The bank said it “would not hesitate” to raise interest rates further if needed, but expectations for when and how high rates would be had changed over the past few weeks.

On October 3, the interest rate was expected to peak at 5.62% in May 2023, according to data from FactSet and Goldman Sachs.

The latest forecasts suggest that the interest rate is now expected to peak at 5.08% in October 2023. Thereafter, a decrease to 4.6% is expected by October 2024 before the rate starts to rise again.