Radical economic policy lands UK in crisis

LIZ Truss was selected as UK prime minister less than a month ago by party activists who saw her as a safe pair of hands, yet her government is already facing a potential full-scale loss of market confidence in its economic strategy.

Last Friday (Sep 23), new UK Finance Minister Kwasi Kwarteng launched an extraordinary emergency budget that turned on the fiscal taps with both massive new spending and also tens of billions of pounds of tax cuts in the largest dose of unfunded stimulus since at least the 1970s. Dramatically, markets have given Kwarteng’s proposals a big thumbs-down with the most negative reaction to any UK fiscal event in living memory.

The crisis deepened on Monday, after the Bank of England’s decision to rule out an emergency rise in interest rates prompted fresh selling of the pound. Financial markets remain far from clear about how the central bank will now respond – reflected by the pound’s movements on Monday, as optimism over an interest rate intervention was followed by disappointment at the failure to deliver this. As of Tuesday, sterling is trading only marginally above parity with the US dollar, its lowest rate with the US currency.