Liz Truss is set to become UK prime minister this week with her plan to “turbo-charge” the economy by slashing taxes already worrying investors amid double-digit inflation.
Should Truss win, she’d inherit inflation at 10.1% and on track to breach 20% for the first time since 1974, according to Goldman Sachs Group Inc. Investors are betting interest rates rise to 4.75% by May, threatening misery for mortgage borrowers more familiar with rates below 1%.
Truss’s view is that cutting taxes and regulations will unleash the nation’s productive potential and take advantage of the opportunities opened when Britain left the EU. Former Bank of England deputy governor Charlie Bean, who was also a member of the government’s fiscal watchdog, the Office for budget Responsibility, believes launching a policy experiment in the middle of a crisis is unwise.
Plans to review the BOE mandate are causing further unease. The Treasury handed the central bank authority over interest rates in 1997, but Truss has suggested the government needs more directive powers. If she follows through, it could dent investor confidence in the institution. “UK government finances are a source of worry,” said Lauréline Renaud-Chatelain, a fixed income strategist at Pictet Wealth Management. “The deficit is very likely to rise meaningfully going forward.”
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