After twice plunging yesterday, the pound has held steady as Asian markets started. Tory backbenchers blame Liz Truss’ mini-Budget after a shocking survey revealed that Labour is outperforming the Conservatives.
The Bank of England may be compelled to raise interest rates within the next two days, according to experts, after failing to calm frightened markets as the pound fell yesterday, fueling worries that the base rate may reach 6% next year.
But after the steep drops in the previous session that raised concerns about an economic slowdown, equities in Tokyo began higher this morning as investors looked for bargains. At 3am, the pound was trading at little over $1.07.
As a result of the sharp decline in the value of the pound, it is said that Tory MPs are upset with Ms. Truss and Chancellor Kwasi Kwarteng. Some have discussed holding another leadership election, while others are concerned that such a move might trigger an early general election.
According to The Guardian, backbenchers, many of whom supported Rishi Sunak, have voiced concern that the new leadership team may have already lost them the next election.
A number of MPs are reportedly worried that if they speak out against Ms. Truss or her mini-Budget, their whips would be taken away.
Following Mr. Kwarteng’s statement, Labour has soared to a sizable poll lead over the Tories – its highest in more than two decades.
According to a YouGov survey conducted for The Times today, Keir Starmer’s party leads the Conservatives by 17 points.
Only 9% of those polled think Mr. Kwarteng’s economic policies would make them wealthier, and 71% disapprove of the proposal to raise the ceiling on bankers’ bonuses.
Following Kwasi Kwarteng’s tax-cutting Budget, Bank of England Governor Andrew Bailey yesterday said in a statement that Threadneedle Street “would not hesitate to act,” although he did not actually implement the rise.
The announcement will have disappointed the markets, according to Viraj Patel, a foreign currency and global macro analyst at Vanda Research, but he predicts that it will only last a day or two before the Bank of England is obliged to take action.
According to the most recent statement, he tweeted, “No movement from the BoE… appears like they aren’t doing anything in between meetings.” The $GBP markets will be let down by this. Before anything happens in the markets and compels the BoE to act, I predict that this statement will endure for 24 to 48 hours.
Meanwhile, there are worries that interest rates might climb to 6%, which would cause mortgage rates to increase by the same percentage.
This evening, Pantheon Macroeconomics’ senior economist Samuel Tombs issued a warning that the typical UK household’s monthly repayments might increase by £597, from £893 to $1,490.
In the first half of 2023, he said, “the typical family refinancing a 2 year fixed rate mortgage would see *monthly* repayments surge to £1,490, from £863 if mortgage rates increase to 6%, as reflected by markets’ current forecasts for Bank Rate.” Most people will just not be able to pay this.
Therefore, the MPC must decide whether to support the pound and run the danger of a financial crisis or to allow it to fall further and concede that inflation will continue to be over goal for as far as the eye can see. The latter would be less harmful, but there are no suitable solutions.
Additional developments
In a statement, the Bank of England said that it was “extremely carefully” observing the markets and “would not hesitate to adjust interest rates by as much as required”;
The Treasury also made an effort to calm the markets when it said it will provide specifics of how it would balance the books on November 23;
Major lenders canceled a large number of loans, throwing the mortgage market into chaos as they feared interest rates may reach 6% next year;
Experts predicted that British exporters would profit from the weakened pound;
The investment bank Nomura forecast that early in 2019, the pound may plummet as low as $0.95; the euro also declined, hitting a new 20-year low versus the dollar at $0.9528; and
In the midst of the market turbulence, the Chancellor will meet with senior insurance executives in the UK today. Sir Keir Starmer will attempt to position himself as the new Tony Blair by asserting in a conference address that Labour is now the party of economic credibility.
If you’re the government or the Bank of England, you should completely disregard it. These markets are incredibly volatile, with some very powerful players clearly holding sizable bear positions while other players step in to challenge them,’ he said.
It is simple to buy the pound if it becomes too cheap because major players are attempting to profit from bad news.
Labour, however, charged that the government had put the UK on a “highway to hell.”
There are also indications of Conservative unease, with former chancellor George Osborne stating that trying to balance “small-state taxes and big-state spending” is “schizophrenic.”
Mel Stride, the chairman of the Treasury Committee, criticized Mr. Kwarteng for insisting yesterday that additional tax cuts, on top of the significant £45 billion package announced on Friday, would be implemented.
One thing is certain, the Tory MP: “Rather than immediately signaling more of the same in the near term, it would be prudent to take stock of how, over time, the markets weigh up recent economic announcements.”
Businesses in the UK are in serious trouble as a result of the weak pound because importing goods from abroad is becoming more and more expensive.
Since many of the companies in the FTSE 100 are valued in pounds but generate revenue in dollars, the index typically increases when the pound declines. The index did, however, lose 50 points this morning, briefly falling below the psychologically significant 7,000 level, before losing 16 points for the day.
Only last Thursday did the Bank raise rates by another half percentage point, to 2.25 percent.
While this would also affect household mortgage borrowing, financial markets are speculating that it might act jointly with another before its next scheduled meeting in November.
“Comments by Chancellor Kwasi Kwarteng that he will go even further with historic tax cuts, which are already being criticized as reckless, have added to the anxiety,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
The concern is that this tax giveaway, which gives higher earners the biggest tax break, will further fuel the fires of inflation in addition to causing borrowing to soar to eye-watering levels.
The fall of the pound has increased the cost of importing goods and commodities like food, clothing, oil, and gas.
Additionally, the mini-effect budget’s on government bonds is causing the cost of UK borrowing to soar, climbing last week by the greatest in a single day in at least a decade.
The Bank of England and the Treasury are now engaged in a contentious standoff, with policymakers committed to attempt to reduce inflation by damping down demand and politicians intensely focused on trying to increase demand and advance their development agendas, according to Ms. Streeter.
Liz Truss’s external advisor and ardent backer Gerard Lyons, chief economic strategist at Netwealth, said that there was “obviously a need today” to “address head-on those market fears.”
“What it implies is that on Friday the Chancellor failed to address the market anxieties,” he said on BBC Radio 4’s World at One program.
The market response has shown that there is certainly a need right now to address those market issues. “The Chancellor arguably should have done more effort ahead of Friday to keep the markets onside,” said the analyst.
The Chancellor must, in my opinion, confront head-on the market fears that his policy is not a sprint for growth, he said. It is about encouraging development, expanding the supply, and he also has to deal with the problems with the so-called affordability.
In response to Mr. Kwarteng’s mini-Budget, gilts experienced their heaviest selling in three decades on Friday, and the pound fell to its lowest level this morning as investors fear that proposed tax cuts will put the government’s finances at risk due to the rising cost of borrowing.
On Friday, he stated: “I’m always calm… ” He yesterday declined to comment on the markets on television. Markets are constantly changing. It’s crucial to maintain composure and concentrate on longer-term strategy.
Today, Sir John Redwood insisted that there was no justification for altering the course of the Budgetary measures.
These markets are all extremely stressed, and occasionally they attack the pound sterling. They also attack other things; they have done well against the Yen, he said.
There is no point in meddling because markets will do what markets want to do.
I see nothing that has occurred in the last two or three days to modify the Budget conclusion, Sir John continued.
After the new finance minister Kwarteng presented unprecedented tax cuts financed by enormous increases in borrowing, sterling dropped to an all-time low of $1.0327 this morning and also declined against other major world currencies.
Former Bank of England deputy governor Sir John Gieve said that if he were still in charge, the falling value of the pound relative to the dollar would worry him. He indicated that the rate increase forecast for two months from now would really happen sooner.
He said: “I believe I would be scared” on the Today show of BBC Radio 4. On that issue, the concern is that they may have to take action a little earlier than that. The bank, as well as the government, have said that they will make their next decision and disclose predictions in November.
According to Polar Capital Fund Manager George Godber, “Some of it may be explained by sustained dollar strength,” he told the BBC.
But particularly, the pound’s movements are a response to the budget that was released on Friday. This was intended to be a fiscal statement rather than a budget. There was a really haphazard approach taken to it; there was no procedure, no due diligence, no use of the OBR. There are some genuinely alarming ones, therefore the Bank of England may need to drastically raise rates to safeguard consumers. In two years, rates might increase by a further 2%, reaching 5.5 percent.
Chancellor Kwasi Kwarteng’s tax and expenditure plans, according to Shadow Chancellor Rachel Reeves, are to blame for the sell-off of the pound.
“I began my career as an economist at the Bank of England,” the Labour MP said on Times Radio. “Like everyone else, I’m really frightened about what we’ve seen both on Friday with market responses to the Chancellor’s so-called mini-budget and to the reaction overnight.”
In her dire words, “more and more of Government expenditure will go on paying the debt rather than going to public services, which are on the verge of collapse right now.” she warned that the decline in the value of the pound would increase the cost of Government debt.
The pound is now at an all-time low in relation to the dollar, while other currencies, such as the euro, are not seeing the same trend. So something is going on in the UK that is not solely related to the strength of the dollar. The Chancellor’s so-called mini-budget from last Friday was the foundation for the selling-off of the pound.
Despite the decline in the value of the pound, the government is still committed to implementing its growth package, according to a minister.
Work and Pensions Secretary Chloe Smith responded to a question from Sky News on the decline by saying, “I am not going to be able to comment on individual market movements and there are a number of things that usually play into that.
‘But the Government is fully committed to delivering the growth package as we lay out, with different ways we will be assisting both individuals and companies to advance to growth and, as I say, better opportunity.
“I want to be able to get more individuals into more decent, well-paying employment,” says me specifically in the Work and Pensions department.
In response to a question regarding the dismal polling the Tories were experiencing, Ms. Smith said, “I have every confidence that the kind of support that the Conservatives were delighted to have in 2019 will continue to follow Liz Truss and be able to have a Conservative government in the years to come.”
You can’t simply borrow your way to a low-tax economy, Mr. Osborne told the Financial Times. The schizophrenia must be treated fundamentally. Small-state taxes and large-state spending are incompatible.
The fall in the value of the pound, according to Carlsberg Marston’s Brewing Company CEO Paul Davies, may result in higher beer prices.
He said that the decline was “worrying” for the British beer industry, which imports beer and hops, on BBC Radio 4’s Today program.
When asked if the value of the pound mattered, he responded, “Yes, it does. Many of the hops used in this country are actually imported, and a lot of them, particularly for craft brewers, are imported from the States. Therefore, changes in currency are actually worrying for industry, for sure. And of course, people drink a lot of imported beers from Europe.
“Of course things will increase,” I would say, “I would say as an industry we’re generally using British barley and we’re using a lot of British hops, but of course if you’re drinking double IPA that obviously requires a lot of Citra hop and other hops from the States, and at some point that is going to have to be passed through to both the customer and the consumer if prices are this volatile.”
As the energy crisis continues throughout the coming winter and the conflict in Ukraine intensifies, the euro also hit a new 20-year low against the dollar. A right-wing coalition was expected to gain a comfortable majority in parliament in Italy after a weekend election.
As investors switched their attention back to the difference between a hawkish Federal Reserve and the Bank of Japan’s determination on remaining with huge stimulus, the dollar strengthened its gains against the yen after the shock of last week’s currency intervention by Japanese authorities.
Chris Weston, director of research at Pepperstone, said that sterling was “certainly being battered.”
Investors are waiting for the Bank of England to respond. When you have twin deficits and declining growth, they claim that this is not sustainable.
The euro recently traded down 0.55% at $0.9641 after falling as low as $0.9528.
The value of the dollar increased by 0.29% to 143.78 yen, moving closer to Thursday’s 24-year high of 145.90. The same day, as Japan’s government engaged in yen-buying intervention for the first time since 1998, it fell to 140.31.
A former senior Japanese currency official predicted on Monday that officials will just carry out more operations to reduce volatility and not attempt to defend a certain level, such as the 145 level.
The dollar index increased by 0.76 percent to 114; previously, it had hit 114.58, its highest level since May 2002.
For the first time since May 2020, the risk-sensitive Australian dollar fell as low as $0.6487 in other currency trading. It last traded 0.1% worse at $0.6524.
The Canadian dollar, a fellow commodity currency, hit a new low against the US dollar at C$1.3625, its lowest level since July 2020.
The offshore yuan of China fell to a new low against the dollar of 7.1630, its lowest level since May 2020.
There were losses in other currencies. The Australian dollar fell to $0.6510, its lowest level since mid-2020. In order to prevent losses, the yen was held steady at 143.47 due to concerns about potential future intervention.
For the first time since 1998, Japan entered the foreign currency market on Thursday to purchase yen.
After falling last week against the strengthening dollar, oil and gold have stabilized. Gold prices on Monday were $1,643 per ounce after reaching a more than two-year low on Friday. Futures for Brent oil increased 71 cents to $86.86 a barrel.
It follows the Bank of England’s announcement on Thursday of a further 0.5 percentage point increase in interest rates to 2.25% while issuing a warning that the UK may already be in a recession.
Prior to this announcement, the central bank had predicted that the economy would expand in the current fiscal quarter. However, it now anticipates that Gross Domestic Product (GDP) will decline by 0.1%, which would mean that the economy would have experienced two quarters of decline, which is the technical definition of a recession.
Economic experts have previously warned that the Chancellor’s plans to slash taxes may put more pressure on the pound, which has already been affected by the US dollar’s rise.
Martin Weale, a former Bank of England policymaker, warned that the new Government’s economic policies would “end in tears” and result in a run on the pound, similar to the one that occurred in 1976.
Additionally, ING economists cautioned on Friday that challenges in the gilt market might cause the pound to drop as low as 1.10 versus the dollar.
According to Chris Turner, global head of markets at ING, a currency may benefit from a combination of looser fiscal and tighter monetary policy provided it can be funded with confidence.
The problem is that investors are skeptical about the UK’s capacity to finance this package, which explains the underperformance of gilts.
“Gilt market indigestion is a genuine possibility, and one that should keep sterling susceptible,” the Bank of England said in a statement. “The Bank of England is committed to lowering its gilt holdings.”
The pound may fall even lower due to measures that “lack credibility” and “raise worries about external financing pressures since the budget and current account deficit combined seems to be going to roughly 15% of GDP,” according to Derek Halpenny, head of research at MUFG.
In a survey conducted by Reuters last week of foreign banks and research consultancies, 55% of respondents said there was a strong danger that trust in British assets would decline significantly over the next three months.
Jonathan Haskel, a Bank of England policymaker, said that the institution was in a difficult situation since the government’s expansionary fiscal policy looked to conflict with the BoE’s attempts to reduce inflation.
The significant borrowing that would be needed to close the shortfall in the government’s finances has alarmed economists.
The two-year freeze on energy prices announced earlier this month for homes and companies may cost more than £150 billion on its own, and the tax cuts might add a further £50 billion to the bill.
According to the reputable IFS think tank, it would be the largest tax change since Nigel Lawson’s 1988 Budget, when Liz Truss’s idol Margaret Thatcher served as Prime Minister.
The continued decline in the value of the British pound relative to the US dollar—which this morning hit a new 37-year low of just 1.11—has highlighted the risks of adding to the UK’s £2.4 trillion pile of debt as the Ukraine crisis drives up inflation.
The 10-year yield on government gilts has experienced the greatest rise so far in August and September since October and November 1979, highlighting the markets’ apprehension about the situation.
Ms. Truss and Mr. Kwarteng, citing decades of mediocre productivity increases, contend that increasing economic activity may make up the gap.