The reaction to the mini-budget has been a cause for concern with the shadow chancellor Rachel Reeves stating that she was incredibly worried.
The Pound recorded a 5% fall against the dollar to hit $1.03, an all-time low since Britain went decimal in 1971. Even though the currency has made some recovery to hit $1.06, it is obvious that the belief in the country’s economic management and the asset has reduced drastically. Over the weekend, UK Chancellor Kwasi Kwarteng promised more tax cuts and spending measures. According to city economists, the Bank of England could be forced to increase interest rates to support the currency.
“That could involve something like a 100bps or 150bps hike in interest rates (to 3.25%/3.75%), perhaps as soon as this morning,” said Paul Dales, the chief UK economist at Capital Economics.
The reaction to the mini-budget has been a cause for concern with the shadow chancellor, Rachel Reeves stating that she was incredibly worried. According to Sanjay Raja, chief UK economist at Deutsche Bank, the price of easy fiscal policy was laid bare by the market. He mentioned that there is a huge risk of a balance of payment crisis as the tax cuts add up to the medium-term inflationary pressure.
Speaking with BBC’s Laura Kuenssberg, Kwarteng said that he does not comment on market movement. In the interview, he stated that his only focus is on growing the economy to ensure that the UK is an attractive place to invest.
Commenting on this, Chris Weston, the head of research at the brokerage firm Pepperstone, disclosed that the UK was the worst performer in the G10 foreign exchange market.
“Investors are searching for a response from the Bank of England. They’re saying this is not sustainable when you’ve got deteriorating growth and a twin deficit. The funding requirement needed to pay for the mini-budget means either we need to see far better growth or higher bond yields to incentive capital inflows,” he said.
Nouriel Roubini, the economist who predicted the 2008 financial crisis, has cautioned that the UK has started to be priced like an emerging market, taking them back to the 1970s. However, Paul Krugman, a Nobel economics laureate believes that the 1970 pound crisis is not likely to occur unless there is a decision to monetize the debt. According to him, it is best to trigger a tighter monetary policy to offset the fiscal stimulus.
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