The financial markets await the reaction of the Bank of England to defend the pound sterling and predict a further increase in interest rates, after the collapse of the British currency as a result of the tax cut presented on Friday by the Government of Liz Truss. The crisis worsened on Monday with the pound at its lowest price since 1971against a strong dollar, after Finance Minister, Kwasi Kwarteng, will add fuel to the fire by warning that there will be even more tax cuts. “After scaring people a lot on Friday, it seems that now he has decided to scare even more over the weekend and the consequence is what we are seeing this morning,” said Martin Weale, a former member of the Bank of England’s Monetary Policy Committee.
Interest rate hike
The markets anticipate that the basic interest rate, currently at 2.25 points, will increase up to 4%, in November and will reach 6% in May of next year. The first of those increases could take place next week, as a weapon to try to defend the pound sterling and curb inflation, currently at 9.9%.
Last Friday the government of Liz Truss announced a tax cut, the oldest in 50 yearsso radical, so huge, that it far exceeded the scale of what was expected and caused the immediate fall of the British currency and accelerated a crisis, which the Bank of England must now try to stop, after Monday’s aggravation. “I am afraid that this type of thing is what is normally tried in Latin American countries without success”, was the verdict of the former conservative finance minister, Kenneth Clarke.
unaffordable debt
What the new executive misleadingly called a “mini budget” included tax reductions of all kinds, for individuals, companies and social contributions. The presentation was not accompanied, as usual, by the figures and analysis of an independent body, the Office for Budget Responsibilitya (OBR), which assesses the consequences of government decisions on inflation and public finances. The markets consider that the level of indebtedness is unaffordable and without these data they do not believe that Truss’s strategy is credible. The Government says it will publish the OBR report by the end of the year, an unacceptably long time frame given the current turmoil and the need for the Bank of England to restore economic discipline.
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The weakness of the pound further increases indebtedness due to the energy bill and the 150 billion euros in aid to homes and businesses. The price of energy is paid in dollars and subsidizing those amounts will now be more expensive. Kwarteng declined to comment on the new negative market reaction at the start of a very eventful week. A government spokesman assured that the budget is going ahead.
Lost of control
In Liverpool where the Labor Party holds annual conference, the person in charge of economic affairs, (Shadow Chancellor), Rachel Reeves, accused the Conservatives of “undermining” the Bank of England’s independence and compared Truss and Kwarteng to “two desperate casino gamblers betting all or nothing”, but “they are not gambling with their money, they are gambling with the our”. The government, Reeves stressed, “has lost credibility, trust and is out of control”.
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Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.