Written by Richard Carter, head of fixed interest research at Quilter Cheviot
Kwasi Kwarteng’s fate shows just how serious the UK’s loss of credibility with the markets was, as he becomes one of the shortest serving Chancellors in history.
The market will have been craving a safe pair of hands to guide the UK through this difficult period, so it will be interesting to see how gilt yields and the pound respond to Jeremy Hunt being given the difficult task of running the public purse. How long he gets to do this for will ultimately be the next question.
Sterling continues to be a prominent victim in this fiasco, with its value against the dollar once again seesawing on the political turmoil that is playing out. This volatility will be going nowhere until we get some sort of stability at the political level and once fiscal and monetary policy are singing from the same hymn sheet. While such volatility can present good opportunity for investors, it is key they are selective in this given how much sway politics is currently having on the UK market.
The expected U-turn on the mini-budget policies will be welcomed by investors and the market as a first step to getting the UK’s public finances back on a sustainable path. It is hoped too that this move takes the pressure off the Bank of England to raise rates too aggressively and thereby reverse some of the extreme moves we have seen in the gilt and mortgage markets.
That is not to say interest rates won’t still rise – they need to in order to help tame the inflation beast – however, the BoE should be reassured enough at this stage that it doesn’t need to go harder or extend its support to pension funds that have been caught out by the rapid rise in yields.