Investors calm as Rishi Sunak wins race for prime minister

Last month, sterling plunged to a record low against the dollar and government borrowing costs rose sharply in the aftermath of outgoing Prime Minister Liz Truss’s mini-budget.

Investors were spooked after then-Chancellor Kwasi Kwarteng promised major tax cuts without saying how they would be paid for – something Mr Sunak warned about during this summer’s Tory leadership contest.

Last week, new Chancellor Jeremy Hunt withdrew almost all of Ms Truss’s tax cuts in a bid to stabilise the financial markets but they have remained jittery.

On Friday, the pound fell as low as $1.11 and government borrowing costs rose amid continued political uncertainty and fresh warnings about the UK economy.

On Monday, government borrowing costs fell back. The interest rate – or yield – on bonds due to be repaid in 30 years’ time dropped to 3.8%. The rate had hit 5.17% on 28 September after the mini-budget and a subsequent pledge by Mr Kwarteng to announce more tax cuts.

Mr Hunt – who is backing Mr Sunak – is scheduled to set out the government’s economic plan for taxes and spending on 31 October.

He has warned the government is facing “decisions of eye-watering difficulty”.

But on Monday, financier and long-term Tory supporter Guy Hands said the Conservative Party was not fit to run the country and risked having to ask the International Monetary Fund (IMF) for a bailout.

He warned that the UK was headed for higher taxes, reduced public services and higher interest rates which would “eventually” lead to a bailout from the IMF “like we were in the 70s”.

At the weekend, the former governor Bank of England warned that the UK is facing a “more difficult” era of austerity than the one after the 2008 financial crisis in order to stabilise the economy.

Lord Mervyn King said the average person could face “significantly higher taxes” to fund public spending.