If Liz Truss is elected by the conservative party to be the new UK PM she could change the BoE’s mandate. This poses a risk to the GBP.

An independent Bank of England (BoE)

Since 1997, the Bank of England has been independent. Prior to this time, the UK Chancellor (Treasurer) would set the interest rate for the UK with assistance from the Bank of England’s Governor. This has been a successful move which moves managing the Bank of England’s interest rate a little further from the political fray.

Bank of England under pressure

As Rishi Sunak and Liz Truss have been competing to win the conservative members over, the policy of the Bank of England has come under scrutiny. Governor Bailey has been criticised for allowing the Bank of England to be slow in tackling inflation. This has allowed political room for Liz Truss to make some new financial assertions.

What will Liz Truss do?

Liz Truss has said that these are ‘unprecedented economic times’ and the ‘business as usual economic strategy’ is not working. In terms of concrete action, Liz Truss has been vague, but she has spoken of these things:

• Review the central bank’s remit,
• Create a potentially new Money Supply target and drop the 2% inflation target.

Investors are worried about how this will work. The Money Supply target was tried in the 80s and worked badly to control inflation then, so it looks like a broken tool that Liz Truss is reaching for.

The takeaway

Expect an announcement in September on the change to the BoE mandate to send the GBP lower and cause a sell off in UK gilts. The detail will be key, but Liz Truss’s approach is feared to make the UK’s problems worse, not better. If US10-year yields start falling again then a GBPJPY short could be a good expression of these fears.