Recent UK political events have been likened to a reality TV show. Policies continue to matter of course, but UK politics has increasingly been about personality, bluster and an uncomfortable relationship with the truth.
This has been true since Brexit and through the Covid pandemic, where politics has increasingly become a driver for financial markets.
The short-lived Liz Truss era (and I’m not sure 45 days counts an era) will be written-up as an unmitigated disaster. She and her team, however, will likely reflect that their policies were no more extreme than those announced in response to previous crisis events. The big thing they seemed to forget is that we are no longer in an era of cheap money. That is why the markets took such fright at spending and tax cuts funded by debt, without a repayment plan. In the past, the Bank of England bought bonds and reduced interest rates in response to both Brexit and Covid, but this time the Bank had to buy bonds in response to bad policy.
The general public should not really be interested in the date of an OBR report or what the level of 30-year gilt yields should be. When that happens, you know something has gone badly wrong.
The markets now expect that, with Rishi Sunak as PM, we have a firm hand on the tiller. For the gilt market there is hope that we will have stable government, which means a chance of stable government policy, the importance of which cannot be underestimated.
In the real world this means households and businesses know how much tax will be, what bills are going to look like, and what regulations are in place. Stability is also a better environment for investment, for borrowing, for spending and ultimately for economic growth. And for financial markets, stability enables us to better understand the macro environment, what growth and inflation are likely to be, and to have a better idea how much gilt supply is coming to the market and how it is going to be repaid.
Gilt yields fell as it became clear that Rishi Sunak would become the next Prime Minister, which was all linked to an expectation of relative stability. Politics will always be real, but let’s hope it can become less entertaining.
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