OPINION
Market Rating Before FOMC MeetingJan 31
UK Markets Have Difficulty in Gaining Stability
On September 23, in the new cabinet, British Finance Minister Kwasi Kwarteng announced the biggest tax cut package of the last 50 years. Presenting the 45-billion-pound budget package in the parliament, Minister Kwarteng argued that some tax increases would prioritize growth, not the justice of income distribution, as planned or implemented by the previous Conservative Party government.
After the government's tax cut package, the British market was officially mixed. While the pound fell to its historical low of 1.0356 against the dollar, Standard & Poor's, the world's leading international credit rating agency based in New York, downgraded the UK's "AA" sovereign rating outlook from stable to negative because the Truss government's package would cause the country's debt to rise.
Subsequently, the Bank of England (BoE) stepped in. We saw that the pound rebound somewhat with BoE's announcements that the new fiscal plan would be evaluated. However, with all this, the opposition also reacted and Finance Minister Kwasi Kwarteng was turned into the target board. Finance Minister Kwasi Kwarteng, on the other hand, underlined that they were focusing on long-term growth rather than short-term market movements regarding the sharp declines in pound and bond prices.
At this point, on September 25, the Bank of England (BoE) sent a letter to the Treasury Committee stating that liquidity conditions were very weak and that a bond intervention would be made to restore the market re-functioning. BoE announced that as of September 28, temporary purchases of long-term UK government bonds would be made and their auctions would continue until October 14. Accordingly, while it was announced that the first stage of bond purchases would be 5 billion pounds per auction, it was underlined that the target of reducing the government bond stock by 80 billion pounds would not be affected.
However, due to both the reactions and the failure of the pound to recover from its historical lows as desired in the same week, the government informed that it would step back from the package on October 3, and brought forward the medium-term plan, informing that it would be announced on October 31st. However, although the pound gained value close to 1% against the dollar and recovered up to 1.1334 points, it was not permanent.
While criticism of Prime Minister Liz Truss and her administration increased day by day due to the volatility in the British markets, the critical news came on last Friday. Prime Minister Truss, who went before the press, announced that Finance Minister Kwarteng was dismissed and that former Foreign Minister Jeremy Hunt was brought in instead.
Speaking at the press conference that she wants to grow the country's economy, the Prime Minister underlined that they will continue to increase the corporate tax. Thus, it was stated by sources close to the subject that the British government aims to collect another £18 billion in tax.
Underlining that she wants to ensure a low tax, high wage, and high growth economy, the Prime Minister answered the question of whether she would resign or not, saying that she is determined to continue her duty. In the shadow of these developments, the pound did not show any significant recovery movement and continued to be traded at 1.1280 levels.
Although nevertheless the new Finance Minister Jeremy Hunt has stated that the income tax reduction scheme will be repealed indefinitely, the Truss government's tax plan and statements make it clear that economic policy prioritizes growth. In particular, high wages and high growth priority mean that the government has put the fight against inflation in the background. At this point, while the BoE continues to increase interest rates, the government's growth-oriented approach may create a mismatch, in a sense, between monetary and fiscal policies. On the other hand, despite the headline CPI falling from the 41-year high in the USA, the US Federal Reserve (FED) continues to tighten aggressively, while it seems inevitable that the pound will remain under the dollar pressure unless there is a new story from the British economic administration.
