The Exchequer Chancellor Sajid Javid‘s abrupt departure is likely to mean a looser fiscal policy, which will be good news for UK assets, but the move has been cautioned by analysts to raise short-term instability.
In a setback to the economy and the British public, yesterday (13 February) the Chancellor, Sajid Javid, announced his resignation, just under a month before he was expected to deliver the first post-Brexit Budget.
Treasury chief secretary Rishi Sunak has been confirmed as his replacement.
The markets appear to have taken the news as a positive development, with the currency rising against both the US dollar and the euro on hopes of looser monetary policy being adopted by the new Chancellor to improve stocks.
Neil Wilson, Markets.com‘s chief market analyst, said: “The pound seems to like this reshuffle. Gilt yields sprung higher, as the market bets on this meaning more spending, less austerity, and more growth. Traders are betting that Johnson and Cummings owning the Treasury and controlling the purse strings means more spending.”
According to Nick Burchett, fund manager at Cavendish Asset Management, the fact that the government and treasury will be on the same page from now on is generally good news: “History tells us that markets don’t respond well when Number 10 and 11 fracture.
Looking forward, the proposed plan to have the Prime Minister’s office and the Treasury singing from the same hymn sheet is preferable for the simple fact it suggests there’ll be greater unity between the two offices.”
Capital Economics said the news could mean an increase in its GDP growth estimates, interest rates, dollar yields, and the pound it said is “already above consensus.”
“We already thought that the Budget on 11 March would involve an extra loosening in fiscal policy worth 0.5% of GDP, which coming on top of the extra government spending announced in September 2019 would mean a fiscal boost of 1.0% is in the pipeline.”
“It’s now possible that the Budget will provide a bigger bang,” said Paul Dales, UK chief economist.
Mohammed Kazmi, portfolio manager for UBP’s absolute fixed income team, said that gilts could outperform German bonds in the face of recent data weakness from Europe and negative growth impact from China.
He said, “The growing theme of fiscal spending globally is one that we expect to pick up as the year progresses, which could also allow for curves to re-steepen, as front-ends should remain supported by accommodative central banks.”