The pound rose against the dollar on the news of Prime Minister Liz Truss’s resignation, before shedding some of the gains. Sterling touched $1.13 at one point before slipping back.
UK government borrowing costs had been falling ahead of the PM’s statement, but then began to edge back up, reports BBC.
One analyst said the reaction of the markets indicated they were “relieved” by Ms Truss’s departure despite there still being a lot of uncertainty.
“Overall, the resignation of Truss is a step that needed to happen for the UK government to move further along the path towards restoring credibility in the eyes of the financial markets,” said Paul Dales, chief UK economist at Capital Economics.
“But more needs to be done and the new prime minister and their chancellor have a big task to navigate the economy through the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis.”
Ms Truss said her successor would be elected in a Tory leadership contest, to be completed in the next week. Her resignation comes after a key minister quit and Tory MPs rebelled in a chaotic parliamentary vote on Wednesday.The Treasury has confirmed that the statement on the chancellor’s economic plan will go ahead as scheduled on 31 October.
Government borrowing costs rose sharply last month after it promised huge tax cuts in its mini-budget without saying how it would pay for them.
But these costs fell back after the Bank of England stepped in with an emergency support programme, and after Jeremy Hunt reversed nearly all the mini-budget measures when he became chancellor.
The interest rate – or yield – on UK government bonds for borrowing over a 10-year period climbed above 4% at one point on Thursday morning, but then fell back steadily as speculation grew about Ms Truss’s possible departure.
However, following the PM’s statement, the rate edged higher again to about 3.8%.
Ahead of the PM’s resignation, Bill Blain of Shard Capital had told the BBC that the markets were “watching in a kind of stunned, open-mouthed horror” at political events.
“The problem we’ve got is that the last couple of weeks has really destroyed the image of political competency and that’s one of the key elements to make any economy work,” he said.
“There are three things you need: you need a stable currency, you need a sustainable bond market and you need competent politics, and because it looks like competent politics are broken that’s creating the volatility that we’re seeing in markets.”
