The first fiscal policy announcement from new British Prime Minister Liz Truss’s government has been met with one of the worst market reactions in modern history.
The rise in 10-year gilt yields above 4% could suggest the market expects that the Bank will need to raise interest rates more aggressively in order to contain inflation. The yield on 10-year gilts has risen 131 basis points so far in September — on course for its biggest monthly rise recorded within Refinitiv and Bank of England data going back to 1957, according to Reuters.
He argued that there is"no empirical evidence" behind the government's claim that expanding fiscal policy in this fashion will drive economic growth, and suggested that the likelihood of an emergency inter-meeting rate hike from the Bank of England was increasing. The prospect of further acceleration to the Bank of England's monetary policy tightening was a common theme for analysts on Monday.
Ibrahim added that this would imply further suffering for U.K. financial markets due to the"unfavorable policy mix" over the near term.
In the context of supply impairments, a tight labor market and almost double-digit inflation, however, Montagne suggested that even the smallest positive demand shock may trigger huge inflationary consequences.
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