Morning Brief – A new stability?

Charles Porter
Thu 20 Oct 2022

A new stability?


Four chancellors in four months. Even if you had not been paying attention to the comings and goings of UK politics, that statistic should ring alarm bells. The UK gained its fourth chancellor in as many months last week in the form of Jeremy Hunt following the ousting of Kwasi Kwarteng by Prime Minister Liz Truss. Kwarteng became the second shortest serving Chancellor in UK history. His tenure in office was longer only by a number of days versus that of the former Chancellor Iain Macleod in 1970 whose untimely death concluded his chancellorship of just one month. The new Chancellor inherits an economy where inflation was read only yesterday at a 40-year high at 10.1% annually, and a whopping 0.5% month-on-month. Moderating prices of petrol in particular had been seen to cool inflation in recent readings, however it was accelerating food prices that drove the figure above analysts’ expectations in September.


Most of the tax cuts and adjustments that had been tabled during Truss’ campaign and initial governance have now been abandoned. The energy support package has also been tamed to contain the multi-billion Pound expected cost to fund it. Despite the rollback on many policies, the Chancellor will still most likely create a large budget deficit to fund the spending plans of this government. In order to do so, the treasury is reportedly looking at streams of taxation revenue to swell, including bank profits. Bank profits from trading revenues have been elevated as published earlier this week. So too, profits on lending are greater as a result of higher benchmark interest rates. With mortgage rates in focus, should the government pursue this taxation adjustment it will have to make sure this is not perceived to drive rates up even higher.


Since the imposition of the new Chancellor, expectations of central bank tightening have come down. The expected path of rate adjustment from the Bank of England is now set to peak in 10 months, rather than the 12/13 months of hiking priced in at the start of the month. The peak of interest rates at the Bank is also now at month to date lows with rates peaking closer to 5% versus some 5.9% priced in just last week. Sterling initially found support from the handover at number 11 with some of the support fading in recent sessions as markets weighed up the impact of spending cuts upon growth amidst widespread uncertainty. Focus remains on the Bank of England who has pushed back the date at which quantitative tightening will resume and postponed sales on longer dated paper to prevent funding pressures at the back end of the yield curve. With some normality restored, GBP may find itself relieved of some selling pressure at least until the government’s medium term statement and gilt sales are forecasted to take place at the turn of the month.




Discussion and Analysis by Charles Porter

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