Troubled UK Financial Market, “Truss Government Can Be Maintained As Long as a Head of Lettuce”

• Fleur Launspach

  UK and Ireland correspondent

The UK central bank will stop buying government bonds today, the bank’s emergency measure has calmed down financial markets over the past two weeks. Now that that “artificial respiration” has disappeared, the question is whether the turmoil in the UK financial markets will return.

Markets reacted vehemently to Prime Minister Liz Truss’s government budget and the pound hit an all-time low. That budget – now called the “kamikaze budget” – contained some 50 billion euros in unfunded tax cuts.

Since it is still unclear where the government gets that money from, the costs of borrowing are rising. Yields on British government bonds have risen so rapidly that pension funds have had problems with their interest rate derivatives. This is why the central bank has decided to intervene. This has had a calming effect, but loan costs are now as high as before the emergency intervention.

British Chancellor of the Exchequer Kwarteng returned early this morning from a trip to the United States for crisis talks with Prime Minister Truss. They might change the budget again.

Westminster is in crisis mode. Withdrawing the budget would be a political humiliation and it is questionable whether the Truss government, which took office a month ago, will survive such a move.

Even continuing with the budget does not seem like a good choice, as it will further fuel the financial turmoil and could further increase the costs of public loans and mortgages.

Premier Liz Truss therefore seems blocked. Meanwhile, the criticism swells and Truss’s party mates have seen her chair legs. The Economist magazine compared the sustainability of her premiership to hers a body beat. In polls, Truss is now shorter than former Prime Minister Boris Johnson at the time of the Partygate scandal.

“Stop prolonging the pain and make your actions consistent”, was the message from the head of the International Monetary Fund (IMF) in London. Yet it is not just the British government that worries the IMF. Government fiscal policies should not undermine central bank monetary policies, the fund warned.

This statement refers to world developments: rising inflation and rising interest rates. Various governments borrow extra to offer support to families and businesses suffering from the energy crisis. Previously, there was significant government support during the pandemic. But that could also push inflation further.

And this while the central banks with their monetary policy are trying to cool the economy and lower inflation. It is not only in the UK that the financial climate is currently restless and vulnerable. It also applies to other economies.