LONDON, Oct 25 (Reuters) – British lawmaker Suella Braverman was reappointed as interior minister on Tuesday by Prime Minister Rishi Sunak, less than a week after she resigned from the role for breaching government rules.
Braverman, 42, stepped down a day before former prime minister Liz Truss did after breaching email security rules, also voicing concerns about the direction of Truss’s government in her resignation letter.
First elected to parliament in 2015, Braverman is regarded as being on the right wing of the governing Conservative Party.
She supports Britain’s exit from the European Convention on Human Rights as what she calls the only way the country can solve its immigration problems, and says it was her “dream” to see a flight deporting asylum seekers to Rwanda take off.
She has said Britain should replace the ECHR with a strengthened British Bill of Rights.
A committed Brexit supporter, she was appointed as a minister in the Department for Exiting the European Union but resigned in protest at former prime minister Theresa May’s proposed divorce deal.
After Boris Johnson became leader, she was later appointed Attorney General in 2020, when she was criticised by some lawyers over whether some government policies were legal.
Reporting by William James, writing by Muvija M and Alistair Smout, editing by Elizabeth Piper
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In his first address as Britain’s prime minister, Rishi Sunak vowed on Tuesday to lead a government of “integrity, professionalism and accountability at every level.” Here is his speech in full:
I have just been to Buckingham Palace and accepted His Majesty the King’s invitation to form a government in his name. It is only right to explain why I am standing here as your new prime minister.
Right now our country is facing a profound economic crisis. The aftermath of Covid still lingers. Putin’s war in Ukraine has destabilized energy markets and supply chains the world over.
I want to pay tribute to my predecessor, Liz Truss. She was not wrong to want to improve growth in this country — it is a noble aim — and I admired her restlessness to create change.
But some mistakes were made — not borne of ill will or bad intentions, quite the opposite, in fact — but mistakes nonetheless. And I have been elected as leader of my party, and your prime minister, in part, to fix them. And that work begins immediately.
I will place economic stability and confidence at the heart of this government’s agenda. This will mean difficult decisions to come. But you saw me during Covid, doing everything I could, to protect people and businesses, with schemes like furlough.
There are always limits, more so now than ever, but I promise you this: I will bring that same compassion to the challenges we face today.
The government I lead will not leave the next generation, your children and grandchildren, with a debt to settle that we were too weak to pay ourselves.
I will unite our country, not with words, but with action.
I will work day in and day out to deliver for you.
This government will have integrity, professionalism and accountability at every level.
Trust is earned. And I will earn yours.
I will always be grateful to Boris Johnson for his incredible achievements as prime minister, and I treasure his warmth and generosity of spirit.
And I know he would agree that the mandate my party earned in 2019 is not the sole property of any one individual, it is a mandate that belongs to and unites all of us.
And the heart of that mandate is our manifesto. I will deliver on its promise: a stronger N.H.S., better schools, safer streets, control of our borders, protecting our environment, supporting our armed forces, leveling up and building an economy that embraces the opportunities of Brexit, where businesses invest, innovate and create jobs.
I understand how difficult this moment is.
After the billions of pounds it cost us to combat Covid, after all the dislocation that caused in the midst of a terrible war that must be seen successfully to its conclusions, I fully appreciate how hard things are. And I understand, too, that I have work to do to restore trust after all that has happened.
All I can say is that I am not daunted. I know the high office I have accepted, and I hope to live up to its demands.
But when the opportunity to serve comes along, you cannot question the moment, only your willingness.
So I stand here before you ready to lead our country into the future, to put your needs above politics, to reach out and build a government that represents the very best traditions of my party.
Together we can achieve incredible things.
We will create a future worthy of the sacrifices so many have made and fill tomorrow, and everyday thereafter with hope.
LONDON, Oct 25 (Reuters) – Rishi Sunak became Britain’s third prime minister in two months on Tuesday and pledged to lead the country out of a profound economic crisis and rebuild trust in politics.
Sunak quickly reappointed Jeremy Hunt as his finance minister in a move designed to calm markets that had balked at his predecessor’s debt-fuelled economic plans.
The former hedge fund boss said he would unite the country and was expected to name a cabinet drawn from all wings of the party to end infighting and abrupt policy changes that have horrified investors and alarmed international allies.
Speaking outside his official Downing Street residence, Sunak praised the ambition of his predecessor Liz Truss to reignite economic growth but acknowledged mistakes had been made.
“I have been elected as leader of my party and your prime minister, in part to fix them,” said Sunak, who broke with the tradition of standing beside his family and cheering political supporters.
“I understand, too, that I have work to do to restore trust, after all that has happened. All I can say is that I am not daunted. I know the high office I have accepted and I hope to live up to its demands.”
Sunak said difficult decisions lay ahead as he looks to cut public spending. Hunt, who Truss appointed to calm markets roiled by her dash for growth, has been preparing a new budget alongside borrowing and growth forecasts due out on Monday, and repeated his warning on Tuesday that “it is going to be tough”.
The new prime minister also restored Dominic Raab to the post of deputy prime minister, a role he lost in Truss’s 44 days in office, but reappointed James Cleverly as foreign minister and Ben Wallace at defence.
Penny Mordaunt, who ended her bid to win a leadership contest against Sunak on Monday, also retained her position as leader of the House of Commons, a role that organises the government’s business in the lower house of parliament.
Sources had said she wanted to become foreign minister.
With his new appointments, Sunak was seen to be drawing ministers from across the Conservative Party while leaving others in post – a move that should ease concerns that Sunak might appoint loyalists rather than try to unify the party.
Sunak, one of the richest men in parliament, is expected to slash spending to plug an estimated 40 billion pound ($45 billion) hole in the public finances created by an economic slowdown, higher borrowing costs and an energy support scheme.
He will now need to review all spending, including on politically sensitive areas such as health, education, defence, welfare and pensions. But with his party’s popularity in freefall, he will face growing calls for an election if he ditches too many of the promises that the Conservatives win election in 2019.
Economists and investors have welcomed Sunak’s appointment – Ryanair boss Michael O’Leary said the adults had taken charge again – but they warn he has few options to fix the country’s finances when millions are battling a cost of living crunch.
[1/8] King Charles III welcomes Rishi Sunak during an audience at Buckingham Palace, London, where he invited the newly elected leader of the Conservative Party to become Prime Minister and form a new government. Picture date: Tuesday October 25, 2022. Photo credit should read: Aaron Chown/PA Wire Aaron Chown/Pool via REUTERS
Sunak, who ran the Treasury during the COVID-19 pandemic, promised to put economic stability and confidence at the heart of the agenda. “This will mean difficult decisions to come,” he said, shortly after he accepted King Charles’s request to form a government.
Sunak also vowed to put the public’s need above politics, in recognition of the growing anger at Britain’s political class and the ideological battles that have raged ever since the historic 2016 vote to leave the European Union.
Workers heading towards London’s financial district said Sunak, at 42 Britain’s youngest prime minister for more than 200 years and its first leader of colour, appeared to be the best of a bad bunch.
“I think he was competent, and that’s really what we should hope for at the moment,” said management consultant, James Eastbook, 43.
With two prime ministers appointed in two months without a popular vote, some called for a general election now but others hoped Sunak would stay until the next scheduled election, due by January 2025.
Sunak, a Goldman Sachs analyst who only entered parliament in 2015, faces a challenge ending the factional infighting that has brought his party low. Many Conservatives remain angry with him for quitting as finance minister in July and triggering a wider rebellion that ended Boris Johnson’s premiership.
Others question how a multi millionaire can lead the country when millions of people are struggling with surging food and energy bills.
“I think this decision sinks us as a party for the next election,” one Conservative lawmaker told Reuters.
Historian and political biographer Anthony Seldon said Sunak would also be constrained by the mistakes of his immediate predecessor.
“There is no leeway on him being anything other than extraordinarily conservative and cautious,” he told Reuters.
Many politicians and officials abroad, having watched as a country once seen as a pillar of economic and political stability descended into brutal infighting, welcomed Sunak’s appointment.
Sunak, a Hindu, also becomes Britain’s first prime minister of Indian origin.
U.S. President Joe Biden described it as a “groundbreaking milestone”, while leaders from India and elsewhere welcomed the news. Sunak’s billionaire father-in-law, N.R. Narayana Murthy, said he would serve the United Kingdom well.
“We are proud of him and we wish him success,” the founder of software giant Infosys said in a statement.
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Rishi Sunak already has experience steering Britain’s public finances through a crisis, but that is unlikely to make tackling the country’s economic challenges any less daunting.
As chancellor of the Exchequer from February 2020 to July this year, Mr. Sunak spent heavily to shield households and businesses from some of the economic fallout from the coronavirus pandemic. Back then, inflation was low and the Bank of England was buying government debt, helping keep interest rates low as borrowing ballooned to pay for the large increase in spending.
Now, Mr. Sunak, who is set to be Britain’s next prime minister after being named leader of the Conservative Party on Monday, will face a very different economic backdrop: The inflation rate has topped 10 percent, the highest in 40 years and, like many countries, the economy is slowing down and at risk of falling into a recession. Meanwhile, the Bank of England is continuing to raise interest rates to curb inflation, and won’t be there to purchase government debt because starting next month it is planning to slowly sell its holdings of bonds. That means the government will rely more on investors, who have been demanding higher interest rates, than the central bank to buy bonds.
In these circumstances, Mr. Sunak has several urgent issues to resolve. One is how to support households squeezed by rising energy costs, after Russia’s war in Ukraine introduced huge volatility into global energy markets. As things stand, household bills have been frozen from this month through to April at an average of 2,500 pounds ($2,826) a year, but after that the government is expected to develop a cheaper policy to help the most vulnerable households. A similar policy is in place to help businesses for six months.
After setting aside tens of billions of pounds to keep energy bills down, the government is also under pressure to show how it will keep borrowing in check, in an effort to restore Britain’s fiscal credibility in markets. Jeremy Hunt, the finance minister recently installed by Liz Truss but a supporter of Mr. Sunak, is scheduled to deliver a fiscal statement on Oct. 31 that he said would show Britain’s debt falling as a share of national income over the medium term.
To bring down debt levels, “decisions of eye-watering difficulty” on spending and tax will need to be made, Mr. Hunt has said. He said he will be asking every government department to find ways to save money despite their already stretched budgets. At the same time, Mr. Hunt said taxes are likely to rise as well. Mr. Sunak, however, is not obligated to keep Mr. Hunt as chancellor or stick to the current timetable for the fiscal statement, though many analysts expect him to.
“The United Kingdom is a great country, but there is no doubt we face a profound economic challenge,” Mr. Sunak said on Monday in a short speech. “We now need stability and unity.”
At this stage, Mr. Sunak hasn’t revealed details about his economic plan as prime minister but investors appear to be taking the prospect of his premiership in their stride.
The pound is trading at about $1.13, a little higher than it was on Sept. 22 before the tax-cutting plan by Ms. Truss that roiled markets, pushing the pound steeply lower and borrowing costs higher. Government bonds yields have fallen from their recent highs. On Monday afternoon, the yield on 10-year bonds was at about 3.75 percent, after closing at 4 percent on Friday. It’s the lowest level since the fiscal statement by Ms. Truss’s government in September.
Lower interest rates will be a comfort to Mr. Sunak. For one, lower rates will shrinkthe amount of money the Treasury will need to set aside for interest rate payments, which could easespending cuts and tax increases. But there are other reminders of the economic difficulties Britain faces.
On Monday, a measure of economic activity in Britain dropped, as the services industry posted its worst monthly decline since January 2021, according to the Purchasing Managers’ Index which measures economic trends. The index for both services and manufacturing activity fell to 47.2 points. A reading below 50 means a contraction in activity.
The data showed that the pace of economic decline was gathering momentum, said Chris Williamson, an economist at S&P Global Market Intelligence.
And on Friday, the credit ratings agency Moody’s changed its outlook on Britain to negative, from stable, while reaffirming the country’s current Aa3 investment grade rating. A lower credit rating tends to lead to higher government borrowing costs.
Moody’s said the outlook was changed to negative because of the “heightened unpredictability in policymaking amid weaker growth prospects and high inflation.” There was also a risk that increased borrowing would challenge Britain’s debt affordability, especially if there was a “sustained weakening in policy credibility.”
These are just the latest in a laundry list of the government’s economic concerns. They include supporting low-income households against the rising cost of living, encouraging investment to improve weak productivity growth, smoothing Britain’s trading relationship with the European Union and growing the labor market to ensure businesses can find people with the right skills.
“We need a clear long-term vision of how the new prime minister will deal with the challenges ahead,” Shevaun Haviland, the director general of the British Chambers of Commerce, said in a statement, “and create the business conditions that allow firms, and the communities that rely on them, to thrive.”
The fall of Liz Truss, Britain’s prime minister for just six tumultuous weeks, has plunged the nation into another phase of economic uncertainty.
When Ms. Truss announced her resignation on Thursday as Conservative Party leader, saying she would stand down as prime minister, the markets that had rebelled against her fiscal policies engaged in a weak and short-lived rally. Investors were left wondering who would be the new leader and what lay ahead for Britain’s economic policy. On Friday morning, government bonds were falling, pushing yields higher, and the pound was dropping.
“It’s a leap into the unknown,” said Antoine Bouvet, an interest rates strategist at ING.
Overall the initial reaction, Mr. Bouvet added, suggested that investors expect that a new prime minister will go ahead with fiscal plans generally supported by the market. But he said it was too early to be sure.
“Let’s see who gets elected leader and what they say on fiscal policy,” he said.
The next prime minister, the third this year, will face a long list of economic challenges. Annual inflation topped 10 percent last month as food prices rose at their fastest pace in more than 40 years. Wages haven’t kept up with rising prices, bringing about a cost-of-living crisis and labor unrest. There is a deepening slump in consumer spending with data on Friday showing people were buying less than before the pandemic. Interest rates are set to rise even as the economy stagnates. And Russia’s war in Ukraine is still rippling through the global economy, especially the energy market.
provoked extraordinary volatility in markets at the end of September when her first chancellor of the Exchequer, Kwasi Kwarteng, announced a plan for widespread tax cuts and huge spending, to be financed by borrowing. Amid the highest inflation in four decades and rising interest rates, markets deemed the plan, delivered without any independent assessment, a rupture in Britain’s reputation for fiscal credibility. The pound dropped to a record low, and government bond yields shot up so violently the central bank was forced to intervene to stop a crisis in the pension funds industry.
began to settle markets. However, bond yields remain noticeably higher than they were before the September tax plan was announced, as investors still demand a higher premium to lend to Britain. On Thursday, 10-year government bond yields closed at 3.91 percent, up from 3.50 percent on Sept. 22, the day before Mr. Kwarteng’s policy announcement.
Ms. Truss’s tenure as prime minister, the shortest in British history, was undone by economic policies that harked back to the trickle-down economics of the 1980s, built on the belief that tax cuts for the wealthy were fair and would lead to investment and economic growth that would benefit everyone.
fixed rates have settled higher.
More on the Situation in Britain
Meanwhile, the new government is likely to be focused on restoring the government’s fiscal credibility. Mr. Hunt is set to deliver a “medium-term fiscal plan,” with spending and tax measures, on Oct. 31. He said he expected to make “difficult” spending cuts as he planned to show that debt levels were falling in the medium term.
It will be accompanied by an independent assessment of the fiscal and economic impact of the policies by the Office for Budget Responsibility, a government watchdog.
While markets have cheered the government’s promise to have its policies independently reviewed, questions remain about how the gap in the public finances can be closed. Economists say there is very little room in stretched department budgets to make cuts. That has led to concerns of a return to austerity measures, reminiscent of the spending cuts after the 2008 financial crisis.
“There is a danger,” Mr. Chadha said, “that we end up with tighter fiscal policy than actually is appropriate given the shock that many households are suffering.” This could make it harder to support people suffering amid rising food and energy prices. But Mr. Chadha argues that it’s clear what needs to happen next: a complete elimination of unfunded tax cuts and careful planning on how to support vulnerable households.
The chancellor could also end up having a lot more autonomy over fiscal policy than the prime minister, he added.
“The best outcome for markets would be a rapid rallying of the parliamentary Conservative Party around a single candidate” who would validate Mr. Hunt’s approach and the timing of the Oct. 31 report, Trevor Greetham, a portfolio manager at Royal London Asset Management, said in a written comment.
Three days after the fiscal statement, on Nov. 3, Bank of England policymakers will announce their next interest rate decisions.
Bond investors are trying to parse how the central bank will react to the rapidly changing fiscal news. On Thursday, before Ms. Truss’s resignation, Ben Broadbent, a member of the central bank’s rate-setting committee, indicated that policymakers might not need to raise interest rates as much as markets currently expect. Traders are betting that the bank will raise rates above 5 percent next year, from 2.25 percent.
The bank could raise rates less than expected next year partly because the economy is forecast to shrink over the year. The International Monetary Fund predicted that the British economy would go from 3.6 percent growth this year to a 0.3 percent contraction next year.
That’s a mild recession compared with some other forecasts, but it would only compound the longstanding economic problems that Britain faced, including weak investment, low productivity growth and businesses’ inability to find employees with the right skills. These were among the challenges that Ms. Truss said she would resolve by shaking up the status quo and targeting economic growth of 2.5 percent a year.
Most economists didn’t believe that “Trussonomics,” as her policies were called, would deliver this economic growth. Instead, they predicted the policies would prolong the country’s inflation problem.
Despite the change in leadership, analysts don’t expect a big rally in Britain’s financial markets. The nation’s international standing could take a long time to recover.
“It takes years to build a reputation and one day to undo it,” Mr. Bouvet said, adding, “Investors will come progressively back to the U.K.,” but it won’t be quickly.
LONDON — For Liz Truss, the end came on Thursday in a midday meeting with grandees of the Conservative Party. But Ms. Truss’s fate as prime minister was all but sealed three weeks earlier when currency and bond traders reacted to her new fiscal program by torpedoing the pound and other British financial assets.
The market’s swift, withering verdict on Ms. Truss’s tax-cutting agenda shattered her credibility, degraded Britain’s reputation with investors, drove up home mortgage rates, pushed the pound down to near parity with the American dollar, and forced the Bank of England to intervene to prop up British bonds.
That repudiation, measured in the second-by-second fluctuations of bond yields and exchange rates, mattered more than the noisy departures of Ms. Truss’s cabinet ministers or the hothouse anxieties of Conservative lawmakers that ultimately made her position untenable.
For that reason, world leaders, buffeted by economic challenges, are watching the turmoil in Britain with anything but relish, concerned about the stability of Britain itself. Interest rates, energy costs and inflation are rising around the world. Labor unrest is proliferating across borders. Non-British pension funds potentially face the same financial stresses that afflicted those in Britain.The last thing leaders want is for Ms. Truss’s woes to be a harbinger for other countries.
President Emmanuel Macron of France, who recently mended fences with Ms. Truss after she refused last summer to characterize him as a friend or foe, said: “I wish in any case that Great Britain will find stability again and moves on, as soon as possible. It’s good for us, and it’s good for our Europe.”
Ms. Truss, economists said, is correct to argue that markets are driven by global trends broader than her tax cuts. Central banks worldwide are raising rates to battle inflation, which has been fueled by a surge in demand as the coronavirus pandemic ebbed and a spike in gas prices driven by Russia’s war in Ukraine.
“The problems are by no means all Truss’s doing but she should have known that getting blamed for everything comes with the territory,” said Kenneth Rogoff, a professor of economics at Harvard and a scholar of financial upheavals.
“What is really worrisome now,” he said, is that the situation in Britain “might be the canary in the coal mine as global interest rates keep soaring, especially as they do not seem likely to come down anytime soon.”
Ms. Truss long cultivated a reputation as a disrupter and a free-market evangelist in the tradition of Margaret Thatcher and Ronald Reagan. Her tax cut proposals made her an outlier among leaders of big economies fighting inflation. But she made no apologies for offending either economic orthodoxy or the expectations of financial markets in pursuit of her vision of a “low-tax, high growth” Britain.
“Not everyone will be in favor of change,” a defiant Ms. Truss said a week ago at the annual meeting of the Conservative Party, even though one of her planned tax cuts, for high-earning people, had already been reversed. “But everyone will benefit from the result: a growing economy and a better future.”
The prime minister’s fatal miscalculation, experts said, was to believe that Britain could defy the gravity of the markets by passing sweeping tax cuts, without corresponding spending cuts, at a time when inflation is running in double digits and interest rates were rising.
“It was the combination of the wrong fiscal policy at the wrong time — borrowing when rates were rising rather than, as in 2010s, when they were low,” said Jonathan Portes, a professor of economics and public policy at Kings College London.
He cited what he called Ms. Truss’s “institutional vandalism,’’ in particular the way she and her ousted chancellor of the Exchequer, Kwasi Kwarteng, broke with custom by announcing sweeping tax cuts without subjecting them to the scrutiny of the government’s fiscal watchdog, the Office of Budget Responsibility.
In that sense, he said, Ms. Truss was following in the footsteps of her predecessor, Boris Johnson, who resigned as prime minister barely three months earlier after a series of scandals prompted a wholesale walkout of his ministers.
Mr. Kwarteng’s budget maneuvering led many in the markets to suspect the government was engaged in a kind of fiscal sleight of hand, which would inevitably require massive borrowing to cover a hole in the budget estimated at 72 billion pounds ($81.5 billion).
Mr. Kwarteng, who studied the history of financial crises as a doctoral student at Cambridge University, brushed off the blowback in financial markets as a temporary phenomenon. Like Ms. Truss, he is a believer in disruptive change. Together, they were among the authors of “Britannia Unchained,” a manifesto for a Thatcher-style, free-market revolution in post-Brexit Britain. Among other things, the authors described Britons as “among the worst idlers in the world.”
When, or even whether, Britain can fully recover from this period of political and economic turbulence is not yet clear. On Thursday, as news of Ms. Truss’s resignation broke, the pound rose against the dollar and yields on British government bonds fell.
Virtually all the government’s planned tax cuts have been reversed, and the next prime minister, regardless of his or her politics, will have little choice but to pursue a policy of spending cuts and strict fiscal discipline. Some fear a return to the bleak austerity of Prime Minister David Cameron in the years after the 2008 financial crisis.
“Rishi or another can steady the ship and calm the markets,” Professor Portes said, referring to Rishi Sunak, a former chancellor who ran unsuccessfully against Ms. Truss and may seek to succeed her. “But it’s hard to see how, given the state of the Conservatives, any Tory prime minister can repair the longer-term damage.”
Much of that damage is to Britain’s once-sterling reputation in the markets. Economists have begun mentioning Britain in the same breath as fiscally wayward countries like Italy and Greece. Lawrence H. Summers, the former U.S. Treasury secretary, told Bloomberg News, “It makes me very sorry to say, but I think the U.K. is behaving a bit like an emerging market turning itself into a submerging market.”
That is a humbling comedown for a country that in 2009 announced a $1.1 trillion emergency fund to bail out the global economy.
“If you’re an American fund manager, you’re not going to put Britain in the super-safe category you might have earlier,” said Jonathan Powell, who served as chief of staff to Prime Minister Tony Blair. “It’s not about Britain’s standing in the world, but what category we’ve put ourselves in.”
BoE’s Bailey says agrees with Hunt on need to fix finances
Some Conservative lawmakers say Truss will be ousted
LONDON, Oct 15 (Reuters) – Britain’s new finance minister Jeremy Hunt said on Saturday some taxes would go up and tough spending decisions were needed, saying Prime Minister Liz Truss had made mistakes as she battles to keep her job just over a month into her term.
In an attempt to appease financial markets that have been in turmoil for three weeks, Truss fired Kwasi Kwarteng as her chancellor of the exchequer on Friday and scrapped parts of their controversial economic package.
With opinion poll ratings dire for both the ruling Conservative Party and the prime minister personally, and many of her own lawmakers asking, not if, but how Truss should be removed, Truss is relying on Hunt to help salvage her premiership less than 40 days after taking office.
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In an article for the Sun newspaper published late on Saturday, Truss admitted the plans had gone “further and faster than the markets were expecting”.
“I’ve listened, I get it,” she wrote. “We cannot pave the way to a low-tax, high-growth economy without maintaining the confidence of the markets in our commitment to sound money.”
She said Hunt would lay out at the end of the month the plan to get national debt down “over the medium term”.
But, the speculation about her future shows no sign of diminishing, with Sunday’s newspapers rife with stories that allies of Rishi Sunak, another former finance minister who she beat to become leader last month, were plotting to force her out within weeks.
On a tour of TV and radio studios, Hunt gave a blunt assessment of the situation the country faced, saying Truss and Kwarteng had made mistakes and further changes to her plans were possible.
“We will have some very difficult decisions ahead,” he said.”The thing that people want, the markets want, the country needs now, is stability.”
The Sunday Times said Hunt would rip up more of Truss’s original package by delaying a planned cut to the basic rate of income tax as part of a desperate bid to balance the books.
According to the newspaper, Britain’s independent fiscal watchdog had said in a draft forecast there could be a 72 billion pound ($80 billion) black hole in public finances by 2027/28, worse than economists had forecast.
Truss had won the leadership contest to replace Boris Johnson on a platform of big tax cuts to stimulate growth, which Kwarteng duly announced last month. But the absence of any details of how the cuts would be funded sent the markets into meltdown.
She has already ditched plans to cut tax for high earners, and said a levy on business would increase, abandoning her proposal to keep it at current levels. But a slump in bond prices after her news conference on Friday still suggested she had not gone far enough.
‘MEETING OF MINDS’
Kwarteng’s Sept. 23 fiscal statement prompted a backlash in financial markets that was so ferocious the Bank of England (BoE) had to intervene to prevent pension funds being caught up in the chaos as borrowing costs surged.
British Prime Minister Liz Truss attends a news conference in London, Britain, October 14, 2022. Daniel Leal/Pool via REUTERS
BoE Governor Andrew Bailey said he had spoken to Hunt and they had agreed on the need to repair the public finances.
“There was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” Bailey said in Washington on Saturday. “Of course, there was an important measure taken yesterday.”
He also warned that inflation pressures might require a bigger interest rate rise than previously thought due to the government’s huge energy subsidies for homes and businesses, and its tax cut plans.
Hunt is due to announce the government’s medium-term budget plans on Oct. 31, in what will be a key test of its ability to show it can restore its economic policy credibility.
He cautioned spending would not rise by as much as people would like and all government departments were going to have to find more efficiencies than they were planning.
“Some taxes will not be cut as quickly as people want, and some taxes will go up. So it’s going to be difficult,” he said. He met Treasury officials on Saturday and will hold talks with Truss on Sunday to go through the plans.
Hunt, an experienced minister and viewed by many in his party as a safe pair of hands, said he agreed with Truss’s fundamental strategy of kickstarting economic growth, but he added that their approach had not worked.
“There were some mistakes made in the last few weeks. That’s why I’m sitting here. It was a mistake to cut the top rate of tax at a period when we’re asking everyone to make sacrifices,” he said.
It was also a mistake, Hunt said, to “fly blind” and produce the tax plans without allowing the independent fiscal watchdog, the Office for Budget Responsibility, to check the figures.
The fact that Hunt is Britain’s fourth finance minister in four months is testament to a political crisis that has gripped Britain since Johnson was ousted following a series of scandals.
Hunt said Truss should be judged at an election and on her performance over the next 18 months – not the last 18 days.
However, she might not get that chance. During the leadership contest, Truss won support from less than a third of Conservative lawmakers and has appointed her backers since taking office – alienating those who supported her rivals.
The appointment of Hunt, who ran to be leader himself and then backed Sunak, has been seen as a sign of her reaching out, but the move did little to placate some of her party critics.
“It’s over for her,” one Conservative lawmaker told Reuters after Friday’s events.
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Reporting by Michael Holden, Alistair Smout and William Schomberg
Editing by Emelia Sithole-Matarise, Helen Popper, Ros Russell and Diane Craft
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Bailey says he talked to new finance minister on Friday
‘Very clear and immediate meeting of minds’ on fiscal challenge
Rates likely to rise by more than thought in August – Bailey
Recent bond-buying not about targeting yields
WASHINGTON, Oct 15 (Reuters) – Bank of England Governor Andrew Bailey said there was an “immediate meeting of minds” when he spoke with finance minister Jeremy Hunt about the need to fix the public finances after the tax cut plans of Hunt’s predecessor unleashed market turmoil.
Bailey, speaking in Washington where British officials attending International Monetary Fund meetings have been put on the spot about the crisis engulfing the country, said he had spoken to Hunt on Friday after he replaced Kwasi Kwarteng.
“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” Bailey said.
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“Of course there was an important measure taken yesterday,” he said at an event where he also hinted at a big interest rate rise by the central bank next month.
Prime Minister Liz Truss, seeking to save her term in office which is barely a month old, said on Friday that Britain’s corporation tax rate would increase, reversing a key pledge made during her bid for Downing Street.
Hunt said earlier on Saturday that some taxes might have to rise and others might not fall as much as planned, signalling a further shift away from Truss’s original plans.
Bailey, speaking at an event organised by the Group of Thirty, which comprises financiers and academics, welcomed the role that Britain’s independent budget watchdog would have in assessing the budget plan that Hunt will publish on Oct. 31.
The Office for Budget Responsibility was not tasked with weighing up the impact of Kwarteng’s “mini-budget” which set off a slump in the value of the pound and government bonds when he announced it on Sept. 23.
“Flying blind is not a way to achieve sustainability,” Bailey said.
Truss criticised the BoE during her leadership campaign, saying she wanted to set a “clear direction of travel” for the central bank. BoE officials pushed back at those comments saying their independence was key to managing the economy.
‘STRONGER RESPONSE’ WITH RATES
Bailey said the BoE might raise interest rates by more than it previously thought because of the government’s huge energy bill support – which could lower inflation in the short term but push it up further ahead – and whatever it decides to do on tax cuts and spending.
“We will not hesitate to raise interest rates to meet the inflation target,” Bailey said. “And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
The BoE raised rates by half a percentage point in August – at the time its biggest increase in 27 years – and then did so again in September with inflation around 10%, far above the BoE’s target of 2%.
It is due to announce its next decision on Nov. 3 and many investors think it will either raise them from their current level of 2.25% to 3% or possibly 3.25%.
In the shorter term, the BoE will be keeping a close eye on how financial markets behave on Monday after it ended its emergency bond-buying programme on Friday.
Bailey said the now-completed intervention was “not about steering market yields towards some particular level, but rather preventing them from being distorted by market dysfunction”.
He said the BoE had acted after the violent market moves which exposed the “flaws in the strategy and structure” of a lot of pension funds.
The intervention was different to the much bigger and longer-running bond-buying that the BoE undertook during the coronavirus pandemic and earlier as a monetary policy tool.
“In these difficult times, we need to be very clear on this framework of intervention,” Bailey said.
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Reporting by Howard Schneider in Washington and William Schomberg in London; Additional reporting by Michael Holden in London; Editing by David Clarke
Our Standards: The Thomson Reuters Trust Principles.
Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.
A look at the day ahead in United States and global markets from Mike Dolan
U-turns are clearly in the air this week, with Elon Musk’s volte face on buying Twitter on Tuesday following Britain’s top rate tax cut reversal and this week’s new-quarter relief bounce in stock markets.
Of course many investors pray global central banks would join the British government and Musk in a similar rethink – but that’s far less likely and reason enough for markets to sober up on Wednesday after the biggest two-day rally on Wall St (.SPX) since the pandemic hit in April 2020.
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New Zealand’s central bank became the latest to stick to its guns lifting interest rates to a seven-year high and promising more to come as it struggles to cool red-hot inflation in an over-stretched economy. read more
British Prime Minister Liz Truss’ speech to her annual party conference is also due and she’s expected to insist the remainder of her fiscal plan remains intact.
Oil price gains this week are also a shot across the bow, with OPEC+ producers meeting in Vienna and looking to agree deep output target cuts despite a tight market. read more
Still there have been straws in the wind this week and some hopes for an easing of the year’s relentless selloff. The Musk news was just an added spur.
Twitter shares (TWTR.N) surged more than 20% on Tuesday after filings showed Musk would proceed with his original $44 billion takeover bid, calling for an end to a lawsuit by the social media company that could have forced him to pay up anyway. read more
The macro backdrop was all about hopes the Federal Reserve would take its foot off the interest rate brake and news that U.S. job openings fell by the most in nearly 2-1/2 years in August encouraged that. read more
With U.S. September private sector payroll readings from ADP due later – with forecasts for another 200,000 job gains – and Friday’s national employment report also in view, stock and bond markets have resumed a holding pattern. U.S. Treasury yields ticked back higher and S&P500 futures and European bourses dialled back almost 1%.
The dollar also steadied after this week’s sharp pullback, though there were growing signs its surge this year is causing some concern for U.S. policymakers as well as those overseas.
San Francisco Fed chief Mary Daly said the Fed is paying attention to the impact of the dollar on global growth because slowing growth abroad can feed back into the domestic economy. read more
“If Europe goes into recession, that’s a headwind; if China falters, that’s a headwind on our growth, and we have to take that into account so that we don’t end up overtightening policy,” she said.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* Global September service sector business surveys.
* U.S. ADP Sept private sector payrolls report; U.S. Aug trade balance
* OPEC+ meeting in Vienna
* U.S. Atlanta Federal Reserve President Raphael Bostic speaks
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By Mike Dolan, editing by XXX <a href=”mailto:firstname.lastname@example.org” target=”_blank”>email@example.com</a>. Twitter: @reutersMikeD. Editing by Jane Merriman
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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
40-year-old Alex Drueke and 27-year-old Andy Huynh were among the among the 10 prisoners released after they each went missing three months ago.
Two U.S. military veterans who disappeared three months ago while fighting Russia with Ukrainian forces were among 10 prisoners, including five British nationals, released by Russian-backed separatists as part of a prisoner exchange mediated by Saudi Arabia, officials said Wednesday.
Alex Drueke, 40, and Andy Huynh, 27, went missing in the Kharkiv region of northeastern Ukraine near the Russian border June 9. They had traveled to Ukraine on their own and became friends because both are from Alabama.
Their families announced their release in a joint statement from Dianna Shaw, an aunt of Drueke.
“They are safely in the custody of the U.S. embassy in Saudi Arabia and after medical checks and debriefing they will return to the states,” the statement said.
Shaw said both men have spoken with relatives and are in “pretty good shape,” according to an official with the U.S. embassy.
Related StoryNo Letup In Hostilities In Ukraine Despite Prisoner Swap
President Joe Biden’s national security adviser Jake Sullivan welcomed the releases and thanked the governments of Ukraine and Saudi Arabia for their work to secure the detainees‘ freedom. “We look forward to our citizens being reunited with their families,” he said in a tweet.
In a later statement, U.S. Secretary of State Antony Blinken said the United States “is appreciative of Ukraine including all prisoners of war, regardless of nationality, in its negotiations” and thanked Saudi government partners for securing the release of the 10 prisoners, including the two Americans.
The Saudi embassy released a statement saying it helped secure the release of 10 prisoners from Morocco, the United States, the United Kingdom, Sweden and Croatia. Shaw confirmed that Drueke and Huynh were part of the group.
The United Kingdom said five British nationals had been released, and lawmaker Robert Jenrick said one of them was Aiden Aslin, 28, who had been sentenced to death after he was captured in eastern Ukraine.
“Aiden’s return brings to an end months of agonising uncertainty for Aiden’s loving family in Newark who suffered every day of Aiden’s sham trial but never lost hope. As they are united as a family once more, they can finally be at peace,” Jenrick tweeted.
British Prime Minister Liz Truss heralded the news on social media.
“Hugely welcome news that five British nationals held by Russian-backed proxies in eastern Ukraine are being safely returned, ending months of uncertainty and suffering for them and their families,” she tweeted.
Moroccan media reported that the released prisoners included Brahim Saadoun, 21, who was sentenced to death in June after being accused of terrorism and trying to overturn the constitutional order. Captured by Russian-backed separatists in Ukraine, the court claimed he was a mercenary, while Saadoun’s father said he had enlisted in Ukraine’s regular army.
Russian state television had previously said Drueke and Huynh were being held by Russian-backed separatists in the Donbas region of eastern Ukraine. The U.S. does not recognize the sovereignty of the Donetsk People’s Republic and has no diplomatic relations with them, making it necessary for others to lead efforts to get the men released.
Drueke joined the Army at age 19 after the terror attacks of Sept. 11, 2001, and he believed he could help Ukrainian fighters because of his training and experience with weapons, Shaw said previously. Drueke left in mid-April.
Drueke’s mother received a call from Saudi Arabia on Wednesday morning and an embassy worker handed the phone to the man, Shaw said.
“He got on the phone and said, ‘Hi mom, it’s your favorite child,’” she said.
Huynh moved to north Alabama two years ago from his native California and lives about 120 miles from Drueke. Before leaving for Europe, Huynh told his local newspaper, The Decatur Daily, he couldn’t stop thinking about Russia’s invasion.
“I know it wasn’t my problem, but there was that gut feeling that I felt I had to do something,” Huynh told the paper. “Two weeks after the war began, it kept eating me up inside and it just felt wrong. I was losing sleep. … All I could think about was the situation in Ukraine.”
Huynh told his fiance he wants a meal from McDonald’s and a Pepsi-Cola when he returns home, Shaw said.
The two men bonded over their home state and were together when their unit came under heavy fire. Relatives spoke with Drueke several times by phone while the two were being held.