Burnham Must Fix UK Economic Credibility

Britain is at an inflection point, according to Katharine Neiss, deputy head of global economics and PGIM Credit. The country has made significant economic progress in recent years, but markets remain nervous due to a lack of credibility. To break the negative loop between monetary and fiscal policy, Neiss suggests that the new administration needs to reinforce the Bank of England's independence.

The UK's inflation shock has led to rate hikes, swelling debt-service costs and forcing governments to spend more. This feedback loop has tempted politicians to tinker with the Bank's remit or its balance sheet losses, further eroding central bank credibility. Markets demand a higher risk premium on UK assets due to this lack of trust.

Neiss proposes granting goal independence for price stability and aligning it with other major central banks like the European Central Bank and Federal Reserve. She also recommends letting existing fiscal rules do their job, dropping the national obsession with fiscal headroom, and making genuine spending cuts to demonstrate fiscal resolve.