Truss’ attempt to boost growth in an economy threatened by recession was fueled by a staggering level of debt, which hurt her government’s financial credibility and rattled markets, raising borrowing costs and weighing on the pound.
The troubled prime minister, who was elected leader of the Conservatives on a tax-cut platform just six weeks ago, announced her resignation on Thursday.
Her budget, peppered with tax cuts and presented last month, aimed to boost growth in the recession-threatened UK economy and freeze energy prices to ease a cost-of-living crisis.
But the costly measures were fueled by a staggering level of debt, which damaged the government’s credibility on public finances and sent bond and mortgage yields soaring.
– Truss Gamble backfires –
“Liz Truss’ grand political gamble backfired in spectacular fashion, but not without causing significant damage to the UK economy,” noted Susannah Streeter, an analyst at stockbroker Hargreaves Lansdown.
“It will take time for the risk premium attached to UK assets to disappear after the post-mini-budget financial meltdown.”
The measures triggered a loss of confidence in the markets that eventually precipitated the downfall of the 47-year-old Oxford-born politician.
Investors also took the view that budget squandering counteracted the Bank of England’s recent rate hikes aimed at curbing runaway inflation.
“Politics over the last few weeks have undermined the confidence of people, businesses, markets and global investors in the UK. This has to stop now if we are to avoid any more harm to homes and businesses,” said Tony Danker, head of the CBI business lobby.
Markets, meanwhile, breathed a sigh of relief after Truss’ resignation. Sterling rose above $1.13 in afternoon trade, while the 30-year government bond yield slipped to 3.94 percent.
It had risen to over 5.0 percent, or the highest level in two decades, after the budgetary rollout.
– Nail in the coffin –
Truss faced one final humiliation late Wednesday when a parliamentary vote to ban fracking ended in chaos, delivering the final nail in the coffin of her office as prime minister.
Her departure comes amid the UK’s deepening cost-of-living crisis, with inflation currently at a 40-year high, fueled by runaway food prices and rising fuel bills.
Market turmoil only eased this month after the BoE launched emergency intervention to buy long-dated government bonds and avert a worsening financial disaster.
The BoE was responding to concerns about pension funds, which are required to invest in low-volatility assets such as long-dated government bonds or government bonds.
Sentiment was further calmed when Truss sacked his close ally Kwasi Kwarteng as Treasury Secretary and replaced him with Jeremy Hunt.
Hunt, a former supporter of Truss’ leadership rival and ex-CFO Rishi Sunak, shredded much of the budget earlier this week.
Truss was forced to end its flagship energy price freeze in April rather than in late 2024.
– “Stability is key” –
All eyes will now be on the ruling Conservative Party’s leadership election to crown the next prime minister.
“Stability is key. The next prime minister must act to restore confidence from day one,” Danker added.
“They must come up with a credible medium-term financial plan and a plan for the long-term growth of our economy as soon as possible.”
The UK will continue to release its medium-term budget plan on Halloween or October 31, along with independent economic forecasts from the Office for Budget Responsibility.
And the Bank of England is widely forecast to hike interest rates by a significant amount on November 3rd.
The bank has already raised interest rates to a 14-year high of 2.25 percent, boosting loan repayments for consumers and businesses.
