Image Source: Bloomberg
In response to the markets’ reactions to Prime Minister Liz Truss’ resignation, the pound appreciated against the dollar, and interest rates on government borrowing fell.
As Ms. Truss announced, the pound’s value surged to $1.13 and then dropped back to $1.12 in the late afternoon.
Despite much uncertainty, one expert claimed that investors were “relieved” by the news.
Business associations stated that the new prime minister must act immediately to regain confidence.
Because it costs more for UK businesses to purchase items like food, raw materials, or parts from other countries when the pound is weaker versus other currencies like the dollar or the euro; for example, the price of goods imported into the UK rises when its value falls.
If businesses charge their clients more, a falling pound can raise costs. In addition, the value of the pound has an impact on travelers’ ability to go abroad.
As the pound fell to a historic low against the dollar last month, the cost of borrowing money from the government skyrocketed after the government’s mini-budget promised significant tax cuts without explaining how they would be paid for.
But after the Bank of England intervened with an emergency support program and Jeremy Hunt overturned nearly all of the mini-budget initiatives when he was appointed Chancellor, these expenses started to decline.
The Treasury acknowledged that Mr. Hunt was scheduled to reveal ideas for spending and taxes on October 31 in his economic plan. Nevertheless, rumors exist that the Conservative leadership election may cause a delay.
Ms. Truss declared that a Tory leadership election would be held the following week to choose her successor. However, after a crucial minister resigned and Tory MPs rebelled in a disorderly parliamentary vote on Wednesday, her resignation followed.
The race to replace Liz Truss
Mr. French claimed that if a clear favorite for prime minister emerged, the markets might rally “more vigorously.” The sooner you arrive, the more likely the winner will receive the backing they need to complete the challenging tasks.
Tony Danker, the executive director of the CBI business lobby organization, stated: “The politics of recent weeks have eroded the confidence of people, businesses, markets, and international investors in Britain.
Had she not pushed through with the mini-budget, which led to her economic experiment—the foundation of her leadership mandate—failing in front of the nation and the entire world, she would still be prime minister today.
Instead of the 45p tax rate, the topic of her conference would have been the generous energy guarantee assistance. Instead of the U-turn on the corporate tax and Kwasi Kwarteng’s firing, last week would have been about the drop in gas prices across Europe and maybe global inflation.
Today’s topic most likely would have been the use of missiles by Russia in the Black Sea.
And even then, she probably could have passed the markets and the House of Commons with a more patient strategy for most of the mini-budget. But her departure is about far more than her leaving Number 10. Now the question is whether it will stop the unrest or what happens next can worsen it.
Why the pound went up
The ten-year UK government bonds yield on Thursday morning rose above 4%. However, as rumors about Ms. Truss’s potential departure spread, the yield progressively decreased.
When a bond “matures,” the government often pledges to repay the investor on a particular day in the future. It continues to pay the loan’s interest during this time.
The mini-budget, however, undermined investor trust in bonds, prompting them to seek a considerably higher interest rate. As a result, some bonds’ values so fell in half.
The yield increased again after the PM’s remarks, reaching roughly 3.8%, but it was still below the level at the beginning of the day.
Bill Blain of Shard Capital said the markets had been shocked at political developments before Liz Truss’s resignation.