(Bloomberg) —
Liz Truss’s government is concerned that persistently high U.S. interest rates could offset the benefits of her deregulation and low tax plan as she tries to transform the U.K. economy.
Officials hope the U.S. will ease its aggressive rate hike path after November’s midterm elections, a senior administration official said on condition of anonymity. If not, there are fears that higher borrowing costs for households and companies will undermine Truss’ promise that her plan can grow before British voters go to the polls in about two years.
Truss has staked her premiership on a growth spurt. She and Finance Minister Kwasi Kwarteng are planning new investment zones, cutting red tape for financial firms and relaxing planning rules to speed up housing construction. But her government has been rocked by market turmoil over Kwarteng’s sweeping tax cuts announced last month.
While the situation has stabilized – with central bank intervention the UK will boost bond markets – consumers and businesses face higher interest payments that could dent confidence and reduce investment.
Money markets expect the Bank of England’s key interest rate to rise from 2 in 2 years. 25% Currently. That was higher than market expectations for the Fed, which peaked below 5%.
Both Truss and Kwarteng tried to blame global pressures for the consequences, including a strong dollar and the impact of Russia’s war on Ukraine, the backdrop for the Prime Minister’s September economic statement 23. Traders responded by pushing the pound to an all-time low but have since rebounded.
Currency crisis
But the currency is still down 16% against the dollar this year, helping to drive up costs as the UK is a net importer. The Bank of England said in September 26 that it was ready to raise interest rates to control inflation, a statement that had the effect of pushing up mortgage rates and borrowing costs for businesses.
Deutsche Bank Chief Economist David Volkertz-Landau told Bloomberg Television last week that a period of high interest rates means the U.K. could enter a “deep and prolonged” period of decline.
The challenge for Truss will be to present the fruits of her reform agenda in time to take place before the next UK general election in January 2025 at the latest.
She also faces a major political challenge to complete controversial economic measures after Conservative MPs forced her to make a humiliating U-turn this week for tax cuts for the top earners.
Pushing unpopular ideas is one thing if it brings growth, but the Conservatives could face a voter reckoning if the benefits don’t materialise.
“It’s a tough time,” financial services billionaire Michael Spencer told a Conservative Party conference in Birmingham, where he served as Truss’ leadership Campaign donations. “All we can do in the UK is focus on our many strengths and maximise them, rather than spend too much time on our shoulders. “
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