However, its recovery has stalled. The pound was trading around $1.10 on Monday amid skepticism that the government’s plan would boost the economy as promised and instead require significant cuts in public spending.
Fitch Ratings said on Monday it expects the UK economy to contract by 1% next year on the prospect of “extreme volatility” in the UK’s financial markets and “rapid rises in interest rates”. Last month it predicted a 0.2% decline next year.
“Rising funding costs, tighter funding conditions, including for mortgage borrowers, and heightened uncertainty will outweigh the impact of looser fiscal policy next year,” ratings analysts wrote. They expect the UK economy to enter recession this quarter.The agency has already changed its rating outlook for the UK to negative.
This was just one of many accusations against the government’s plans. For example, the International Monetary Fund has lobbied governments to reassess tax cuts, saying they increase inequality.
But Truss is looking to reverse years of slow growth and low productivity, and it’s clear he wants to run the economy differently than his predecessor. One of his early decisions was to fire Tom Scholar, a top Treasury official. The move upset some analysts. The government announced his successor, James Bowler, on Monday. He is moving from the International Trade Department, but previously at the Ministry of Finance where he worked for 20 years.
Despite the government’s conciliatory moves, there are signs of distress in financial markets.On Monday the Bank of England said it would scale up intervention in the bond market. Banks scale up daily auctions with bond buying programs set up to help. The pension fund said after this market turmoil threatened the UK’s financial stability.
Over the past eight days of trading, banks have only bought about £5bn of long-term government bonds in total, despite setting a daily cap of £5bn. The central bank said it would step up support as markets questioned what would happen if bond purchases ended on Friday. New collateral lines will be set up to not only increase the size of the auction, but also to alleviate the liquidity challenges faced by pension funds. That functionality will continue beyond this week.