The financial markets have welcomed the news that Rishi Sunak will become the new prime minister – but business leaders called on him to end recent “political and economic uncertainty”.
The uncertainty was caused by his predecessor Liz Truss’s mini-Budget, which she sacked former chancellor Kwasi Kwarteng over before she eventually resigned herself after just 45 days in Downing Street.
It was announced that Mr Sunak had won the Tory leadership contest on Monday afternoon.
Ms Truss’s predecessor Boris Johnson had never formally declared his candidacy and was evasive about whether he received enough endorsements from Tory MPs. Commons leader Penny Mordaunt dropped out of the race.
Markets had largely already expected – and positively reacted to – a Sunak victory before it was officially announced.
Ahead of the announcement, shares on the FTSE 100 index initially rose by as much as 0.5 per cent, before falling to nearly 0.8 per cent down. In the afternoon the FTSE recovered again, rising by 1.1 per cent.
The pound had initially dropped in value against the dollar following the confirmation, but it spiked about an hour later. At around 3pm, one pound could buy a little over 1.13 dollars, up 0.25 per cent on the day.
The interest rate that the government pays on its 30-year gilts dropped by 0.2 per cent on the day to 3.8 per cent and was largely unimpacted by Mr Sunak’s victory.
Deputy governor of the Bank of England Sir Dave Ramsden told MPs at the Treasury Committee that the recent improvement in gilt yields had shown that credibility is returning to British economic policy.
Meanwhile, the British Chambers of Commerce (BCC) called on the former chancellor to work on steadying the economy.
It said that firms need more certainty on energy support, finding workers, and boosting exports.
BCC director general Shevaun Haviland said: “The political and economic uncertainty of the past few months has been hugely damaging to British business confidence and must now come to an end.
“The new prime minister must be a steady hand on the tiller to see the economy through the challenging conditions ahead.”
Kate Nicholls, the boss of the UK Hospitality trade body, said “stable political leadership is absolutely critical” and that the body had worked “very closely” with Mr Sunak when he was chancellor.
She added: “I would encourage him to extend business rates relief, reform the entire business rates system in the longer term and lower the current rate of VAT.”
Mr Sunak will have to “work hard to restore credibility in the eyes of the financial markets” as a recession is forecast, Ruth Gregory, senior UK economist of Capital Economics, said.
Chancellor Jeremy Hunt, who has replaced Mr Kwarteng, is expected to announce a tightening of spending when he details his medium-term fiscal package on 31 October.
Although he has already “wiped from history most of Truss/Kwarteng’s tax policies, a fiscal hole of around £34bn remained”, Ms Gregory said.
She added that there is “the risk is that the recession will ultimately be deeper or longer than we currently expect”.
On the other hand, Mr Sunak should go against supporting certain types of business if he wants to help slash emissions and meet his pledge to deliver on the government’s climate targets, said Kierra Box, campaigner at Friends of the Earth.
“Yet his track record as chancellor – which saw new North Sea oil and gas fast-tracked, levies for domestic flights cut and a weak windfall tax on profiting fossil fuel companies imposed – suggests otherwise,” she said.