September 24, 2022
By Noor Nanji, business reporter, BBC News
image provided, Getty Images
In the foreign exchange market on the 23rd, the British pound fell to the lowest level in 37 years against the dollar. It’s a reaction to the biggest tax cuts in 50 years by the new government of Liz Truss.
The pound fell more than 3% against the dollar at one point to $1.09. Against the euro, it fell more than 1% to 1.12 euros.
On the stock market, British stocks were generally down, with the FTSE 100 index down 2% on the day on the London Stock Exchange (LSE). Yields on British bonds have also skyrocketed and prices have fallen.
“We do not comment on market movements,” said Finance Minister Kwazi Kwartengu.
Finance Minister Kwartengu announced a range of tax cuts and economic policies to revamp the government’s finances. He said there would be £45bn in tax cuts by 2027, “turning the cycle of stagnation into a cycle of growth”.
Meanwhile, the Treasury said the package of measures would add £72bn to public debt.
Britain’s key interest rate is expected to reach 5.2% in August 2023, according to Bloomberg data. The central bank, the Bank of England, is expected to raise interest rates by 1 percentage point at its monetary policy committee meeting in November this year.
Paul Johnson, head of the Institute for Fiscal Studies (IFS) think tank, said the market reaction was “concern” that the government’s new strategy relied on domestic borrowing by investors. .
“The plan appears to be to borrow heavily at ever-increasing interest rates, put government debt on an unsustainable growth trajectory, and hope that economic growth will improve.”
Mr Johnson said there was a risk that prices would rise further if the new strategy boosted demand amid high inflation. He also said the Bank of England was going against the government in the same period and was likely to raise interest rates to meet the £45bn tax cuts.
Deutsche Bank strategist George Saravelos also said the Bank of England would need an emergency unscheduled rate hike as early as next week to “restore market confidence”. He said the move demonstrated the bank’s “will to bring inflation down no matter what.”
The Bank of England announced on Thursday that it will raise interest rates to 2.25%, the highest level in 14 years. It warns that the UK economy may already be in recession.
Former U.S. Treasury Secretary Larry Summers told Bloomberg that the pound could fall below the dollar, saying: “It’s very disappointing that Britain’s behavior is similar to how emerging economies are going down on their own.” I think,’ he said.
“The Bank of England has fallen far behind the curve with Brexit, but this fiscal policy now will make the UK a major country pursuing the worst macroeconomic policies. “
What is the UK’s New Fiscal Strategy?
Boris Johnson’s previous government used to raise taxes to invest in public services, but Chancellor Kwartengu said the tax hike would “hurt Britain’s competitiveness”, calling it a “mini-budget”. announced a new policy.
Under the new policy, a plan to reduce the income tax by 1 percentage point to 19% has been brought forward by one year and will come into effect in April next year. It also increased the amount of stamp duty to be paid when buying a house, and added incentives for first-time homebuyers.
But Shadow Finance Minister Rachel Reeves of the main opposition Labor Party said, “The Conservatives cannot solve the cost of living crisis because they are the cost of living crisis.” He said he just went back to trickle down past.
Liberal Democrat leader Sir Ed Davey said, “Conservatives have no clue about families struggling to pay their bills.”