No one could have predicted the wave of tax cuts unleashed by the new U.K. Prime Minister after she took office.
Friday's fiscal announcement was anything but a mini-budget with a lot of tax cuts not seen in Britain since 1972
The country has been put on an economic road completely at odds with most, if not all, major global economies as inflation and a cost-of-living crisis have become a reality.
It has been seen by some of her supporters as a political and economic gamble with Truss yet to face the wider British electorate in a nationwide vote.
The market players predicted that Britain would have to increase its debt load to pay for the cuts.
Friday was a bad day for the U.K. bond markets. The 5-year gilt's yield rose by half a percentage point, which was the largest one-day rise since 1991, according to reports.
After hitting a 37 year low against the dollar, sterling was sent into freefall. It was down nearly 4% against the US dollar. Since the vote to leave the European Union, it has lost 27%.
What went wrong can be provided by contacting cnBC support.
For the first time in history, Wall Street banks are considering a break lower to parity with the U.S. dollar.
The Times and The Guardian both said it was a budget for the rich. The Daily Mail hailed the budget as a true Conservative one while Kwarteng declined to comment on the currency moves.
According to ING analysts, investors are worried about the U.K. Treasury's commitment to open-ended borrowing for these tax cuts, and that the Bank of England will have to raise rates more aggressively.
ING's Senior Rates Strategist and Global Head of Markets Chris Turner said in the note that the jump in gilt yields has more to do with a market that has become chaotic.
There are a number of indicators that suggest that the market is malfunctioning. A signal from the BOE that it is willing to suspend gilt sales would go a long way to restoring market confidence. The Bank of England is fighting a battle that is not worth fighting.
The U.K.'s long-term outlook is stable with the big three ratings agencies, but there is a risk of a possible shift to a negative outlook when they are reviewed in October and December.
The price of easy fiscal policy was laid bare by the market on Friday.
Friday's market moves suggest that there may be a credibility gap.
He said that a plan to get the public finances on a sustainable footing would be necessary but not enough for markets to regain confidence in an economy with large twin deficits.
With fiscal policy shifting into easier territory, the onus may now fall on the Bank of England to fix the economy and plug the gap between expansionary fiscal policy and tightening monetary policy.
Karen Gilchrist is a correspondent for CNBC.
All Rights Reserved © 2024
