Pound Soars Following Mini-budget U-turns
The UK government reversed course several times after announcing tax-cutting measures in last month’s mini-budget, which caused the pound to rise.
Pound Sterling increased by about 0.9% on Monday to trade above $1.12.
Chancellor Jeremy Hunt will expedite tax and expenditure measures totaling many billions of pounds later today.
The mini-budget “went further and faster than markets were expecting,” said Prime Minister Liz Truss, who fired Kwasi Kwarteng on Friday.
Market turbulence was attributed to Mr. Kwarteng’s mini-budget announcement from the 23rd of September. The price of UK government bonds plunged significantly, and the pound plummeted to a record low of $1.03.
At 08:00 BST, the UK government bond market is scheduled to reopen (07:00 GMT). Since the Bank of England discontinued its emergency support on Friday, it will be the first time.
Goldman Sachs has downgraded the UK’s economic growth as a result of recent market volatility and changes in the government’s economic policy.
The investment bank downgraded its prediction for the UK’s economic production in 2023 from a 0.4% decline to a 1% decline.
In part because of “much tighter financial circumstances” and the anticipated increase in corporation tax rates beginning in April 2019, Goldman predicted a “more substantial recession in the UK.”
According to analysts at the EY Item Club, the UK economy is “likely to be in recession until the middle of 2023” as a result of “high energy prices, increased inflation, rising interest rates, and global economic weakness.”
When the economy contracts for two consecutive quarters of three months, this is considered a recession.
The government’s support for energy bills for homes and businesses, according to EY, has decreased the likelihood of a severe downturn, so this one won’t be as awful as past ones.
Compared to its earlier summer prognosis, which predicted the economy would expand by 1% in 2023, the economic forecasting agency has dramatically revised its projection.
According to Hywel Ball, chair of EY UK, “there is little doubt that the UK economy faces a challenging period ahead, with global headwinds adding to domestic pressures.”
The government’s energy bill intervention is anticipated to lessen the severity of the slump, while ONS data indicates that households may have access to a greater pandemic savings cushion than previously believed.
Because of the government’s action over energy prices, the EY Item Club predicted that inflation would peak at just under 11% in October, which is lower than earlier estimates. At the moment, the inflation rate is 9.9%.
EY issued a warning, predicting that average annual inflation will continue to exceed average annual wage growth through 2024 and that household real incomes will likely fall by the most over the coming year since the 1970s.
The prime minister’s choice to name Mr. Hunt as chancellor, according to consulting firm Pantheon Macroeconomics, “did little to decrease the risk premium contained in UK assets.”
Therefore, researchers added, “Households and Businesses are still facing a huge increase in their borrowing costs.”
The government spending cut that will soon take place in real terms “seems destined to be larger than in the 2010s,” they continued.
BBC
