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What does Liz Truss as PM mean for the economy and markets?

Energy cap could impact inflation

A major contributor to current inflation in the UK is energy, and Truss’s first act as Prime Minister – capping average household energy bills at £2,500 a year for two years – could have a wide-reaching impact.

We’ve already seen inflation – which has been rising for ages – ease a little. It dropped to 9.9% for the year to August, down from 10.1% in July, mainly because of falling petrol prices (although it remains at a 40-year high). Truss’s cap could help it fall further.

Depending on other factors, it could also lead to:

  • the full-year inflation estimates for 2022 and 2023 coming down significantly
  • a lower risk of recession in the UK.

This potentially means less need for the Bank of England to use multiple, large, 0.75% interest rate hikes to tackle rising prices, which is what the US did. Rates should still rise in the coming months, but probably less than markets expect.

On the other hand, this kind of economic support from the government could, alongside other proposed tax cuts, add more fuel to the inflationary fire we’ve seen for the best part of a year now. People have more, people spend more, and prices go up.

The experts at Coutts behind our customers’ investments believe it could mean lower rate hikes than the market expects for the rest of this year, which could potentially be good for investors, but more hikes than the market is expecting next year.

It’s always worth remembering that the value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. 

Our positioning

Earlier in the year, the Coutts team identified a number of headwinds for the UK economy, and so had already reduced our exposure to UK stocks.

We’ve also diversified our bond holdings away from just UK gilts to a basket of bonds from the G7 countries – the US, France, Germany, Italy, Japan, the UK and Canada. We’ll actively increase or decrease how many bonds we hold from each region in line with how we think they’re doing.

If you'd like to discuss this or anything regarding your investments with us, please speak to your Premier Manager.

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As always, Premier 24 is available any time for your day-to-day banking needs or book an appointment with your Premier Manager if you need to discuss something more in-depth about your financial plans.

Call Premier 24 on 0333 202 3330

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This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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