British Prime Minister Liz Truss’ U-turn is very humiliating for her, given that she has built her campaign around pro-growth and business slogans. She is currently sailing on rough waters, and the dismissal of Kwasi Kwarteng, who was in power for only one month, seems to be much worse for her than for the former finance minister. Despite being inspired by the mini-budget policy, the economic vision does not cease to be hers. It is not easy to imagine that Liz Truss, whose personal mandate has been dealt a critical blow, will be able to remain in the post of prime minister for a long time. We wouldn’t be surprised if Conservative MPs force her to resign in the next few days. The January 2024 election is still two years away, so perhaps the Conservative Party will decide that in order to stay in power, it needs to move forward immediately with a new leader. Will this be a positive development for the markets? This is likely the case because UK bond yields have risen sharply since the mini-budget was presented on 23 September. Concerns about the inflationary impact of proposed tax breaks were also responsible for the initial spike in bond yields.

However, this resulted in a self-fulfilling dynamic after pension funds were forced to sell government bonds to receive guarantee funds. In an effort to prevent massive and desperate selling in the wholesale market, the Bank of England was forced to intervene, taking generous measures to provide liquidity and prevent an undesirable increase in benchmark bond yields. This will have a destabilizing effect on the country’s economy and, possibly, on the global financial system. Things started to improve this week as there were rumors of a major change in government. While the outlook for UK economic policy remains uncertain, a decision to cut government borrowing plans and move the Treasury to stronger hands such as Jeremy Hunt could lower bond yields and reduce market pressure. At the same time, the pressure on the Bank of England is easing, and if initially the markets expected the interest rate hike by 150 bp. after the announcement of the mini-budget, today we are talking about 100 bp. at the meeting on November 3 and 90 m. December 15th.

* Mr. Calum Pickering is an economist at Berenberg Bank.