abrdn: New UK finance minister brings more relief to bonds market

abrdn: New UK finance minister brings more relief to bonds market

October 17, 2022

Politics UK
Britse Parlement.jpg

James Athey, Investment Director at abrdn, comments on the political developments in the UK.

The UK’s latest Chancellor is burnishing his more traditional conservative credentials with authority. PM Truss may still believe that a pro-growth agenda, despite the starting point, is right for the country but her position is so incredibly weak that this counts for nought right now. Conservative Party members might as well have voted for Sunak and saved us all this angst because we are ending up pretty much where the former Chancellor wanted during his campaign for the top job.

The rolling back of planned tax cuts was the absolute minimum required but Jeremy Hunt is going further and this will provide greater relief to the gilt market. By introducing a more targeted approach to the energy relief package from April 2023 the current occupant of Number 11 is recognising the scale of fiscal mismatch which had been central to the problems in UK assets over the prior few weeks.

The UK still faces an economically challenging year ahead with recession all but inevitable and uncomfortably high inflation likely to feature for many months to come. That will of course keep pressure on the Bank of England to continue removing the monetary punchbowl at a rapid clip. However, today’s statement now completes the complete U-turn from the disastrous mini-budget of the new government, and in doing so, should allow markets to function more normally in the weeks ahead. Unfortunately, sterling stagflation and lower interest rates are still not a particularly happy combination, and thus, with King Dollar still in the ascendancy, we suspect that the pound may struggle to recover further than it already has.

 The next question likely to be posed by international investors is: just how long now can the PM survive?

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