Liz Truss’ first task is obvious: announce a plan on energy prices to get the country through the winter. The second task, though, is almost as important: avoid scaring the financial markets. On that score, Deutsche Bank’s currency analysts were merely stating the obvious in a note on Monday when they greeted the new prime minister by saying the risk of a balance of payments crisis in the UK “should not be underestimated” and that “policy announcements over the next few weeks will be key in determining the risk of extreme macro outcomes”.
A remarkable feature of the overlong leadership campaign is that the sketch of “Trussonomics” has barely graduated from soundbites about a “pro-growth” mindset and “supply-side reforms”. Both ambitions might be considered virtuous goals, but the accompanying promise of unfunded tax cuts is what worries markets. Today’s pressing problems are a widening current account deficit, the highest inflation in the G10 group of rich nations and a large chunk of national debt payments tied to interest rates. Looser fiscal policy is not the orthodox prescription to those problems.
The great hope of the Truss camp, it seems, is that markets will smile benignly and embrace a vision that imagines a bigger deficit being part of a step towards a permanently higher growth trajectory for the UK economy. That, at least, is the gamble. But the plan is more likely to be received with an open mind if investors also know that the Bank of England will continue to be the guardian of monetary policy.
The campaigning hints and nudges that Threadneedle Street’s mandate could be reviewed must sound alarming from abroad. They haven’t been heard from any other incoming PM since independence was granted in 1997. For the
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