Financial markets showed calm reactions as former British Chancellor of the Exchequer Rishi Sunak won the leadership of the ruling Conservative Party and headed for the post of British Prime Minister.
The pound sterling was broadly unchanged against the dollar on Monday afternoon, and government borrowing costs remained low after the majority leader in the British House of Commons, Penny Mordaunt, withdrew from the Conservative leadership race.
The pound sterling earlier recorded a rise near $1.14, before recording a decline.
Last month, the British currency hit a record low against the dollar, and government borrowing costs rose sharply in the wake of the mini-budget announced by retired prime minister Liz Trace.
Investors were spooked after then-finance minister Kwasi Kwarting promised deep tax cuts without saying how they would be financed, something Sunak warned against during the summer Conservative leadership race.
The new Chancellor of the Exchequer, Jeremy Hunt, last week rolled back almost all of the tax cuts approved by Truss in a bid to stabilize financial markets, which had become restless.
On Friday, the pound sterling fell to a record low of $1.11, and government borrowing costs rose amid continued political uncertainty and fresh warnings about the UK economy.
Government borrowing costs fell again on Monday, and the interest rate on 30-year bonds fell to 3.8 percent. The rate hit 5.17 percent on Sept. 28, after the mini-budget announcement, and Quarting promised more tax cuts.
Hunt is to produce an economic plan for the government on tax and spending at the end of this month.
Hunt warned that the government was facing “very difficult decisions”.
Chiffon Haviland, director general of the British Chambers of Commerce, said the country “cannot afford any more political unrest”.
Responding to the new prime minister’s announcement, she added: “The political and economic uncertainty that has prevailed over the past few months has seriously damaged confidence within British business and must now end.”
“The new prime minister must be a strong hand in the economy through the difficult times ahead,” said Haviland.
“This means putting in place comprehensive plans to deal with the major issues facing businesses, high energy bills, labor shortages, rising inflation and rising interest rates,” she added.
But Guy Hands, a long-time Tory supporter and financier, said on Monday that the Tories were not fit to run the country and risked asking for a bailout from the International Monetary Fund.
“I think they (the party) need to continue to fight their own internal wars and really focus on what they need to do for the economy, recognizing some of the mistakes they’ve made over the last six years frankly. land on a dead end,” Hands said.
He warned that the UK was headed for higher taxes, government job cuts and higher interest rates, which would “eventually” lead to an IMF bailout “like we were in the 1970s”.
Lord Mervyn King, former governor of the Bank of England, also warned that the UK faces a “much more difficult” era of austerity than the one that followed the 2008 financial crisis to stabilize the economy.
King said the average person could face “much higher taxes” to fund public spending.
Why does the fall in the pound sterling matter?
A fall in sterling pushes up the prices of goods and services imported into the UK from abroad, because when sterling is weak against the dollar or the euro, for example, the cost of buying things like food, raw materials or spare parts buying from abroad costs UK businesses over.
If companies pass these higher costs on to customers, a weaker pound can contribute to an increase in inflation, the rate at which prices rise.
The price of the pound also affects Britons who travel abroad and buy prizes with their own money.
The pound has been under pressure recently due to the strength of the US dollar.
However, the pound’s weakness in recent weeks is more related to growing concerns about the future of the UK economy and public finances.
The official inflation rate rose to 10.1 percent last month, and a further rise is expected.
The UK is also borrowing billions of pounds to reduce rising energy bills for households and businesses.
The Office for National Statistics said borrowing, to bridge the gap between spending and tax revenue, totaled 20 billion pounds last September, an increase of 2.2 billion pounds on the previous year. This is the second highest lending rate in September since monthly records began in 1993.
The Institute for Fiscal Studies predicted that borrowing would reach 194 billion pounds this year, almost double the figure previously projected by Britain’s Budget Responsibility Authority, an independent body that monitors budget performance.