The movement of the pound and bonds on Thursday will be the first major economic test of Prime Minister Rishi Sunak’s government as UK inflation accelerates to a 41-year high of 11.1%.
The reaction by markets could prove to be instrumental in the PM’s longer-term leadership success, says the CEO of one of the world’s largest independent financial advisory organisations.
The comments from Nigel Green, chief executive of deVere Group, come ahead of Chancellor of the Exchequer Jeremy Hunt delivering the Autumn statement – a Budget in all but name.
He says: “Hunt has the difficult job of trying to plug a gaping hole in the UK’s finances – reportedly £50 billion – and to tame inflation which is now running at a 41-year high, without pushing the economy battling into the abyss of a painful recession.
“With Prime Minister Rishi Sunak’s backing, he will use the Autumn Statement to set out an agenda to raise taxes and squeeze public spending.”
The deVere CEO continues: “However, arguably one of the most critical things Hunt has to try and achieve is to get the markets on-side and restore credibility and stability.
“Financial markets are unforgiving — as we saw after Liz Truss’s disastrous mini-budget when the pound hit historic lows against the dollar, gilt yields jumped, and stock markets fell due to reckless economic policies.
“The reaction of the pound and the bond market on Thursday will be seen as a critical test on whether Hunt and Sunak have got the agenda right.
“Liz Truss was largely forced to quit because she got on the wrong side of bond markets, which sets the rate at which the government can borrow money to fund all the things it needs to do.
“If the pound rallies and the cost of government borrowing falls, it will be a win for Sunak’s government.”
But with the intensifying cost of living crisis and screaming headlines about 11.1% inflation, what might please financial markets, might not be good for political careers and voters.
“Hunt and Sunak are walking a fine line,” says Nigel Green. “There’s a long history of financial markets flexing their muscle in politics, and Thursday is another key test for the government and how the Conservatives will be viewed at the next election, likely in two years from now.”
He concludes: “The Chancellor’s Autumn Statement will instantly be judged by the value of the pound and gilt yields.
“It could also determine the fate of this government in two years’ time by voters.”