Liz Truss, the British prime minister, announced her resignation on Thursday. Her economic policy, which divided her Conservative Party and sent shockwaves through the markets barely six weeks after her appointment, was the cause.
Having lost her authority just over six weeks into the job due to the failure of her economic policy, Truss was struggling to hold onto her position.
The markets responded to Prime Minister Liz Truss’ departure by increasing the value of the pound relative to the dollar and lowering the cost of government borrowing.
As Ms. Truss made her announcement, the value of the pound surged to $1.13 and then dropped back to $1.12 in the late afternoon.
Despite the fact that there is still a lot of ambiguity, one analyst claimed that investors were “relieved” by the news.
Business associations stated that in order to regain confidence, the new prime minister will need to act immediately.
Because the pound is more expensive for businesses in the UK to purchase items like food, raw materials, or parts when it is weaker against the dollar or the euro, for example, a decline in the value of the pound raises the price of products and services imported into the UK from abroad.
If businesses decide to raise prices for customers despite rising costs, a lower pound might make costs rise even faster. The value of the pound has an impact on travellers’ ability to go abroad.
The government borrowing costs dramatically increased when the government promised significant tax cuts in its mini-budget without explaining how it would pay for them, while the pound fell to a record low versus the dollar last month.
However, these expenses started to decline once the Bank of England intervened with an emergency support programme and after Jeremy Hunt, who was appointed chancellor, nearly completely undid the mini-budget initiatives.
Politics
Truss announced that the leadership of the Conservative party she leads would be chosen within a week.
Less than a week after sacking her finance minister, Truss lost her interior minister, Suella Braverman, which led to her resignation. “Serious concerns” about the government were voiced by Braverman.
What is behind the crisis?
In order to stop a rapid sell-off in the 2.1 trillion pound ($2.3 trillion) market for British government bonds that threatened to devastate the pension industry and raise recession risks, the Bank of England was compelled to engage in emergency bond purchases.
After Kwasi Kwarteng, the then-new finance minister, announced a tax cut on September 23, the sell-off got underway.
Truss declared that company tax would increase to 25% as anticipated by her predecessor Boris Johnson, reversing her prior plan to freeze it at 19%, after removing Kwarteng, a close friend and ally, on Friday. The highest rate of income tax cut under Kwarteng had already been reinstated.
In a remarkable U-turn to try to win back investor confidence, Hunt cut back her substantial energy support programme and abandoned “almost all” of Truss and Kwarteng’s economic plan on Monday.
The BoE actions have drawn attention to a developing area of liability-driven investing in the British pensions industry.
While LDI assists pension funds in using derivatives to “match” assets and liabilities in order to reduce the likelihood of distribution shortages, the rising interest rates have forced those funds to make urgent requests for collateral in order to cover the swaps.
