Pound Rebounds, UK Borrowing Costs Drop as Sunak Becomes Prime Minister

British Prime Minister Rishi Sunak waves to members of the media after taking office outside Number 10 in Downing Street, London, on Oct. 25, 2022. Dan Kitwood/Getty Images

The value of the pound has rallied back to its highest levels since before last month’s crash and the cost of UK government borrowing has decreased, as financial markets react to Rishi Sunak’s appointment as the new UK prime minister.

Sterling lifted 1.9 percent higher to 1.149 against the U.S. dollar after the new prime minister started to confirm appointments to his new cabinet.

The increase saw the pound worth more than at any point since Sept. 15, though it eased back marginally to 1.146 during afternoon trading in London.

Meanwhile, gilt yields, which determine the interest that the UK government pays on some of its loans, were also lower.

Yields on 30-year gilts were 0.1 percentage points lower at 3.65 percent, around the levels seen before the shock caused by former Chancellor Kwasi Kwarteng’s “mini-budget.”

Failure of ‘Trussonomics’

Sunak’s predecessor Liz Truss wanted the UK to become a “low-tax, high-growth economy that would take advantage of the freedoms of Brexit.”

The so-called “mini-budget,” delivered on Sept. 23, was intended to jump-start Truss’s new economic programme—nicknamed “Trussonomics”—with massive tax cuts worth £45 billion ($50 billion).

Britain's Prime Minister Liz Truss announces her resignation outside of 10 Downing Street on Oct. 20, 2022. Daniel Leal/AFP via Getty Images

But it went badly wrong, as her plan to fund the tax cuts with government borrowing instead of spending cuts led to fears of unsustainable government debt levels.

The ensuing turmoil in the financial markets caused the pound to fall to an all-time low of 1.032 against the dollar, and led to an increase in borrowing costs for both the government and British households.

The Bank of England responded with a package of emergency government bond purchases which helped to steady some concerns over higher government borrowing costs.

Truss was forced to sack Kwarteng and carry out a series of humiliating U-turns. She appointed veteran MP Jeremy Hunt as the new chancellor of the Exchequer, who subsequently overturned almost her entire economic plan.

Fixing ‘Mistakes’

In his first speech as prime minister, Sunak vowed to fix the “mistakes” of his predecessor and to rebuild economic stability and confidence.

He said the UK is facing a “profound economic crisis” caused by the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine.

Sunak suggested his government will make “difficult decisions” to drive down government debt.

“I will place economic stability and confidence at the heart of this government’s agenda. This will mean difficult decisions to come,” he said.

“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,” he added.

Sunak pledged that his government will have “integrity, professionalism, and accountability at every level” and he vowed to earn the trust of the British public.

PA Media contributed to this report.