As the government’s tax-cutting and borrowing bonanza risks losing financial markets confidence, the pound fell to a new 37-year low against USD.
Investors were scared by the possibility of unfunded tax cuts in the chancellor’s fiscal statement, driving the pound to its lowest point since 1985. Sterling fell 3.2 percent against the dollar to $1.0895, after Kwasi Kwarteng announced tax cuts of PS140 billion to increase growth. In 1985, the US forced the pound to as low $1.05 due to an international currency depreciation agreement.
The benchmark UK 10-year bond yield, which measures the government’s borrowing costs and is a measure of that, rose sharply, rising to 3.8 percent. It gained 40 points in less than an hour after the chancellor’s speech, making it their highest level since 2011. The yield on benchmark UK 10-year bonds rose sharply to 3.8 per cent. This is the highest level since 2011.
The market’s rapid loss of confidence about the government’s ability to finance a record-breaking current account deficit, which relies on constant foreign income to fund, reflected in the twin sell-offs of currency and government bonds. The large fiscal spending just announced could boost growth in the short-term. The bigger question is: Who will pay? George Saravelos, Deutsche Bank spoke.
Larry Summers, Clinton’s Treasury secretary, and ex-president of Harvard University, said to Bloomberg that it would not surprise him if the pound falls below a dollar if the current course is maintained. It is not the right time to pursue supply-side economics, naivety, or wishful thinking in this country.
The money markets have doubled their odds that the pound will parity with the dollar in this year’s market. This means there is an 18 percent chance of $1 to the Pound becoming the first ever parity in history.
Investors are also predicting that the Bank of England will have to tighten its grip on the interest rate accelerator in order to limit inflationary effects of tax cuts, and spending that could reach PS300 billion over four years.
Investors believe there is a 50% chance that the Bank will increase its base rate 100 basis points at its November meeting and reach a maximum of 5.4% by next year. Yesterday, the monetary policy committee stated that it is ready to act if domestic inflationary pressures increase.
Inflation is stoked by a weak currency, which makes imports more expensive and increases the cost of goods. Deutsche Bank’s Saravelos said that the Bank should quickly raise rates and regain market confidence.
Economists believe that the wide range of tax-cutting actions will be able to boost the economy’s short-term, decrease the severity of a possible recession this year, and keep inflation hot. According to the Bank, inflation is expected to remain at double digits most of the year.
Before Kwarteng’s fiscal statement, the pound was already in trouble. Its losses have accelerated since then. Sterling has lost more than a fifth against the dollar in this year’s fiscal statement and is now at its lowest trade-weighted value ever.
Kwarteng’s plans caused UK stocks to fall. The FTSE 100, which houses the country’s largest listed companies, opened flat, but fell 163 points or 2.3% to 6,996.61. The more UK-oriented FTSE 250 dropped 374 points or 2 percent to 17,957.30.