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Britain must quickly restore economic credibility

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To borrow Ernest Hemingway’s words, government gradually and suddenly suddenly loses credibility. The UK has proven itself as a textbook example. After Kwasi Kwartengs’ reckless mini-budget last Friday, the pound hit an all-time low against the dollar, gold yields soared, banks rushed to lure in mortgage products and the IMF fiercely rebuked the prime minister’s plans. Then on Wednesday, the Bank of England intervened to support the gold market as pension funds face an urgent need for cash. It’s still weekdays. Governments must act quickly and decisively to restore trust before further casualties occur.

Investors criticized the Truss government’s economic strategy. Soaring gold yields and a weakening currency partly reflect distrust of the Prime Minister’s plans to finance historic tax cuts and energy subsidies through debt only backed by promises of improving growth. His proposal will trigger inflation already close to 40-year highs and will require higher interest rates when debt burdens are already at risky levels. Investors would have acquiesced if Kwarteng had adhered to its well-known plans to reverse increases in corporate tax and state insurance in addition to its planned 150 billion energy aid program. But in the absence of further unexpected tax cuts and offsets, the market was terrified by the indifferent nature and endless scale of the Prime Minister’s unfunded promise.

The BoE must pick up the pieces. We started the last emergency intervention we saw in the early days of the pandemic, and we started making temporary purchases of sows over a long period of time. This was significant after market turmoil pressured pension funds, which manage millions of dollars of savings, to sell bonds to avoid concerns about solvency. The BoE also delayed its plans to start selling gold frames from next week, which would have intensified downward pressure on bond prices. Long-term gold yields have declined since the announcement.

The intervention may have given it some breathing space, but BoE is in an enviable position. Raising interest rates higher than previously expected could significantly increase mortgage payments on floating instruments or stop traditional fixed rate trading. This will happen as homes face nearly double their energy bills last winter, despite government subsidies. A blow to the economy would significantly reduce house prices. Companies with high debt will also be under pressure.

This is a financial crisis that the UK government created itself. We need to reconsider our bad growth plans and cancel a large portion of our tax cuts. This entails large political costs, but not doing so can cost more.

The government must also quickly provide persuasive details on how to meet its highly optimistic 2.5% growth target and stabilize public finances in a way that does not rely entirely on announcing a medium-term fiscal plan starting November 23. We have to survive interventions, including rate hikes, ahead of our November meeting. Above all, the government must show that it is listening to the financial markets.

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The decline after Friday’s cavalier mini-budget showed that governments cannot ignore due process, independent oversight and economic expertise. By seriously undermining Britain’s economic and financial integrity, the new Conservative administration is gambling with the money, pensions and housing of the British people. The BoE can only support the market for now, but restoring UK confidence will be a challenge for the government. You must hurry.

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