Kwasi Kwarteng’s first budget built on the promises laid out by Prime Minister Liz Truss in the run up to her taking office. If anything he went further than many expected, taking a big political risk with his scrapping of the cap on bankers’ bonuses and the highest rate of income tax.
The approach of the new Chancellor seems at odds with that of the Bank of England’s Monetary Policy Committee. Expectations for a 0.5% increase in the interest rate were fulfilled, though this fell short of the 0.75% increase announced by the Federal Reserve Bank and is still well shy of the inflation rate. Most commentators are now raising their expectations for where rates are heading, with 4% or even more pencilled in for early next year.
Our own stock market hardly greeted the news with enthusiasm. With markets weak on the other side of the Atlantic, shares had already been drifting lower, but the initial reaction to this so-called fiscal event was an accelerated fall as sellers gained the ascendency. There is little doubt that the new administration is gambling on economic growth being propelled higher, but one consequence could be further upward pressure on inflation.
At the very least these measures will add significantly to the debt burden we are carrying, which is already high thanks to the help meted out to combat Covid. This, coupled with the rise in the cost of living, could prompt the Bank of England to be more aggressive in its interest rate policy. We will need to watch closely how things pan out in the months ahead to determine if the Chancellor’s efforts to break the vicious stagnation spiral is actually working.
Meanwhile, there is plenty going on elsewhere in the world, not least in Ukraine. Perhaps the political party conference season will slow announcements from the Government, but realistically we have a great deal to digest, following recent pronouncements. Investors, already nervous that recessionary times are unlikely to be avoided in the short term, seem set to remain in a cautious mood. It remains to be seen if the measures we have seen from the Truss administration can raise our hopes.