UK: Truss vs Sunak – And why it matters
|-
Polls largely favour Liz Truss over Rishi Sunak ahead of the Conservative Party leadership election on Monday.
-
We expect substantial fiscal easing if Truss wins. This could lead to a further increase in both inflation and rates.
-
We expect the GBP FX impact to be limited in our base case although the potential for higher rates could add slight support. Importantly, EU-UK relations could re-emerge as a theme for markets.
The final round of the Conservative Party leadership election is coming up with foreign secretary Liz Truss and former chancellor Rishi Sunak being the two final candidates. Polls largely favour Liz Truss to take office with an estimate of 59% of MPs in her favour (Figure 1). There are many things on the new PM's plate with inflation running high, household energy bills soon set to triple compared to last year, rising recession risk and renewed focus on the Northern Ireland protocol. Below we look at how the election matters for fiscal policy, monetary policy and EU relations.
Fiscal easing amid cost of living crisis
A key difference between Truss and Sunak is their views on fiscal easing. Truss intends to scrap planned tax increases arguing that the cost of living crisis weighs too much on the British economy. On the other hand, Sunak emphasises that tax cuts will only fuel inflation further and hence should be ruled out until inflation is under control. Both Truss and Sunak have pledged to step up household support, although none of them have detailed how much.
Regardless of which candidate takes office, we expect Parliament to approve a support package to households. In the case of Truss we expect the package to be substantially larger. Doubling the cost of living support from GBP15bn and GBP30bn is widely discussed. However, a doubled support package will not add up for the eroding real value of some families' income. If the support package is deficit-funded there is a risk for a further upside to inflation and by extension rates and yields.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.