All eyes are on the former UK chancellor as he begins his new role as Prime Minister this week, replacing Liz Truss, in what has been a tumultuous year for Britain’s economy. Taking the helm of an economy battered by inflation and soaring energy costs, Rishi Sunak immediately pledged to stabilize markets and restore economic confidence.
“I understand, too, that I have work to do to restore trust after all that has happened. All I can say is that I am not daunted,” Sunak said. “I know the high office I have accepted, and I hope to live up to its demands.”
Initial reaction was mixed after he was confirmed on 25 October as the value of the pound rallied back to its highest levels since before Truss’s debt-fueled mini-budget but London’s biggest market inched lower.
The FTSE 100 ended the day down 0.51 points, or 0.01%, at 7,013.48. The pound was up 1.77% against the dollar at 1.148 and was 0.79% higher against the euro at 1.151 at the close of trading.
Will it be a short-lived honeymoon or the beginning of a new era?
While there is initial hope Sunak as Prime Minister can shore up Britain’s weakening economy, analysts say wider market positivity is still clouded by record-high inflation and fears of a global recession looming on the horizon.
“The Bank of England is expected to raise interest rates up 75 basis points to 3.0% in November so that will impact the government’s fiscal plan and policy decisions in the near future,” said Chris Lean, investment director, Aisa International. “Investors who are cautiously optimistic long-term should still closely monitor bond market performance and gilt volatility.”
Prime Minister Sunak hopes to unite a demoralized Conservative party, he also takes on the challenge of calming markets and taming inflation as the UK also faces broader economic woes persisting from the pandemic, the war in Ukraine, and Brexit.
Britain’s growth rate has lagged compared to pre-coronavirus levels – its economy is now 0.2% smaller than it was before the pandemic, according to the Organization for Economic Co-operation and Development.
Is there a fiscally credible path forward?
Brits will have to wait a bit longer to hear the government’s new plan to repair public finances – Finance Minister Jeremy Hunt announced they will delay the release of the UK fiscal statement until 17 November – two-and-a-half weeks later than originally planned. Hunt reportedly needs more time to strategize with Sunak on how to reduce debt and fill a £35bn fiscal shortfall to grow the economy.
Sunak’s philosophy of higher taxes and curtailed spending is key to his overall agenda, but higher government borrowing costs could be daunting to his bottom line.
“If the new fiscal policy is too loose or too tight it could tip the scales in the wrong direction, so the big challenge is going to be finding that fine line of balance between rising taxes, spending cuts, and maintaining steady growth,” Lean said. “But whatever measures are taken, consistency and predictability are key to calming overall markets.” ###
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