‘A total mess’: The City has spoken on the Tory Party – and it isn’t pretty

The pound’s fall has eclipsed almost all of its rivals. There is now serious talk of it reaching parity with the greenback. That will have consequences

“Investors seem inclined to regard the UK Conservative Party as a doomsday cult.”

So said Paul Donovan, the chief economist at UBS Wealth Management. Donovan has a reputation for telling it like it is. Cutting out jargon and making economics understandable is his thing. He is always eminently quotable. Yet this is nonetheless a striking way for a City professional to describe a party, which was once the natural home of the denizens of the square mile and their clients.

However, Donovan is not wrong. The market reaction to Kwasi Kwarteng’s £45bn debt-funded gift to the wealthy and comfortably off has been savage. It isn’t just Donovan who has looked on aghast. “A total mess,” is something I heard several variations on when I talked to some of my friends in the City.

Britain’s borrowing is going to get very expensive. This should come as no surprise. Prior to their mini-budget, Kwasi Kwarteng and Liz Truss sacked the Treasury’s top civil servant and shut out the Office for Budget Responsibility (OBR).

Trouble is, while you can flip off your civil servants and your advisers, you can’t do the same to the markets – because the markets will inevitably respond in kind. They did just that, pushing the pound – a proxy for the world’s view of a country’s economy – to a record low against the dollar.

True, the dollar has surged across the board; a consequence of the aggressive actions of the US Federal Reserve, which has imposed consecutive 0.75 per cent interest rate rises and made the currency very attractive to investors as a consequence.

But the pound’s fall has eclipsed almost all of its rivals. There is now serious talk of it reaching parity with the greenback. That will have consequences. What a legacy for Downing Street’s terrible twins.

Energy is priced in dollars, for starters. This is going to make it even more expensive than it might otherwise be, stoking Britain’s already sky-high inflation. But it isn’t just energy.

The price of a huge basket of other goods that we import are pegged to the dollar – Primark provides a good case study here. The fast fashion retailer buys most of its clothes from Asia, and recently said it planned to hold its prices and accept lower margins in the face of the inflationary surge in Britain. The shares of owner Associated British Foods took a kicking as a result. It was, however, a savvy move, with the group’s eyes fixed firmly on its brand, its customer base and the long term prospects of the business.

Will it still be able to hold the line in the face of Truss and Kwarteng’s vandalism? That must be open to question as its input costs soar. The market’s savage reaction to the mini-budget now opens up the very real possibility of an emergency meeting of the Bank of England’s Monetary Policy Committee (MPC) and an unplanned interest rate rise.

The Bank, surprisingly, imposed only a 0.5 point increase at its last meeting. But three of the nine members of the rate-setting MPC voted for 0.75. Even that now looks light given the sugar rush the government has given inflation.

Here’s the killer: those tax cuts that were supposed to deliver growth. That’s why they were delivered. Yet the market forces the government has unleashed threaten to quickly wipe out their value.

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The chief beneficiaries would be wise to invest the extra cash ahead of the rainy day that is surely coming. They may do that.

As for the poor? Do I need to spell it out? True, sometimes these events turn into squalls that blow over. Markets have a tendency to panic before correcting. This does not, however, feel like a squall. It looks more like a storm that could blow away the Tory government’s undeserved reputation for economic competence, just as when the markets forced the pound out of the ERM when John Major was prime minister.

No, the financial markets should not be the chief arbiters of policy. But politicians can’t afford to treat them with contempt, because if they do, they will get bitten. They’re biting now and biting hard. This is what happens when an economic doomsday cult grabs the levers of power and sets up the mother of all car crashes.