[ad_1]
Treasury orthodoxy has won.
Kwasi Kwarteng’s tax-cutting mini-budget has been all but ripped up and a chastened government is now having to admit to the public that a fresh wave of austerity – in the form of both tax increases and, in all probability, public spending cuts – lies in store.
In truth though, it is not Treasury orthodoxy that has won, but the bond market.
As was noted on the day of the mini-budget, when gilts, UK government bonds, began to sell off, the so-called ‘bond vigilantes’ have returned to impose fiscal discipline on the UK government by selling its bonds and, in so doing, forcing up its borrowing costs.
It was, as has been noted several times over the last two weeks, the kind of punishment beating usually meted out on emerging market economies. And that was no coincidence.
As Larry Summers, a former US treasury secretary during Bill Clinton’s presidency, told Bloomberg TV at the height of the gilt sell-off: “The UK is behaving like an emerging market turning itself into a submerging market.”
Gilt yields – implied government borrowing costs – have fallen now that Jeremy Hunt, the new chancellor, has unwound most of his predecessor’s unfunded giveaways. So, too, have market expectations of where Bank rate will peak in the Bank of England‘s current rate-tightening cycle.
But both remain higher than they were prior to Mr Kwarteng’s mini-budget. Credibility has been lost among investors and more will now need to be done to win them back.
The end of Truss?
Some have asked whether gilt yields and market expectations over the peak in Bank rate might fall further were Liz Truss to resign as prime minister.
This feels doubtful. Markets are dispassionate and care more about policies than about personalities. The reason why the gilt market reacted so positively on Friday last week to initial reports that Mr Kwarteng had been sacked were because he…
[ad_2]
Source : skynews
