BlueBay AM: David Riley on Liz Truss' announcement as Prime Minister

BlueBay AM: David Riley on Liz Truss' announcement as Prime Minister

September 6, 2022

Politics UK
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David Riley, Chief Investment Strategist at BlueBay Asset Management, shares his thoughts on the announcment that Liz Truss will be the new Prime Minister of the United Kingdom.

Liz Truss faces a daunting in-tray as Britain’s new Prime Minister. The immediate issues she faces - the energy and cost of living crises and a stagnating economy - reflect longer-term problems of low investment and productivity.

Russia’s squeeze on gas supplies to Europe and soaring gas and electricity prices have also exposed the fragility of the UK energy market and security of supply. Addressing these weaknesses while honouring the UK’s ‘net zero’ carbon emission commitments will require imagination and investment. As an economic liberal, she wants to cut taxes and regulations but with government debt near 100% of GDP and interest costs rising, there is little fiscal room for manoeuvre.

Truss reiterated her commitment to cutting taxes in her acceptance speech, but also said her government would tackle rising energy bills and improve the NHS. The gilt market and sterling are unlikely to take too kindly to a big increase in government borrowing at a time of high inflation and rising interest rates unless backed up by a credible plan to reduce government borrowing and debt over the medium-term.

Truss has said she also wants to review the Bank of England’s mandate and whether it remains ‘fit for purpose’. Like many other central banks, the Bank of England has been guilty of being too late to respond to the inflation threat. But anything that smacks of reducing the independence of the Old Lady of Threadneedle Street would worry international investors that are funding the UK’s big twin budget and trade deficits at time when inflation is the highest amongst the G7 economies.

Hard choices rather than wishful thinking are required to boost long-term growth potential of the British economy and maintain confidence in the monetary and fiscal policy framework. The credibility of the new Prime Minister’s economic policy programme will be judged in the bond and foreign exchange markets.

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