Britain: “Alert” for sterling and the economy and political turmoil

London, Thanasis Gavos

Sterling was steady in morning trading on international markets, gaining slightly against the dollar against the dollar last night after hitting an all-time low of 1.03 on Monday morning.

The stabilization of the British currency, even at parity levels which constitute a 37-year lowattributed to the Bank of England’s statement yesterday that it will not hesitate to raise the key lending rate to whatever level is needed to control inflation.

Analysts, however, stress that worry and uncertainty remain, as the only international currencies against which sterling has not fallen since last week are the Chilean peso, the Gibraltar pound, the Falkland Islands pound and the St Helena pound.

The fall in sterling was caused by the Chancellor of the Exchequer’s mini-budget Quasi Kwarteng of the new Tras government, which was presented on Friday. Despite warnings of further fueling inflationary pressures, Mr Kwarteng went ahead with announcing £45bn of tax cuts while confirming a £210bn anti-energy austerity package, funded through increased government borrowing.

Concerns about the stability of public finances and inflation have driven the current turmoil, while the government talks about speculative games in the markets.

A simultaneous effect of this disruption is the increase in borrowing costs for the British government. The yield on the 10-year UK bond has risen this month by 1.45% to 4.2%, the biggest monthly rise since 1979. The two-year government bond now offers a yield of 4.5%, the highest in more than 14 years .

This situation, like the prepaid one further increase in interest rates, led three mortgage banks to freeze the supply of new mortgages (total or specific types of loans) from Monday evening. Estimates currently suggest that the central bank’s key rate could reach 6% in the coming months from the 2.25% it has already risen to since last week.

Finance Minister Mr. Kwarteng will have meetings with the heads of major banks and other City officials later in the day, and he is being heavily criticized for his moves.
Mr Kwarteng was accused by former Bank of England deputy governor Charlie Bean of rushing to cut taxes, as in the current environment priority should be given to controlling inflation and structural reforms.

Fed chief Rafael Bostic warned that the UK government’s fiscal plan “has increased uncertainty and has really made people wonder what the trajectory of the economy is going to be”. He added that in this way the risk of a global recession increases.

Former US Treasury Secretary Larry Summers and declared himself “very pessimistic” about sterling after the British government’s “completely irresponsible” mini-budget. He even predicted that the British currency would fall to less than one-to-one against both the dollar and the euro. He also noted that the problem for Britain is intensified by the growing budget deficit.

While the British press and the opposition have already given Mr. Kwarteng the derogatory nickname “kamikazee”, political editors are taking the deep discontent inside the ruling Conservative Party as well.

MPs appear willing to vote against the fiscal bill that will include the mini budget measures, while there are even reports of submitting letters of no confidence against Liz Truss to the relevant party body, just three weeks after the new prime minister was elected to power.

Meanwhile, a new poll by the YouGov company gives a lead of 17 percentage points to the main opposition Labor Party in the intention to vote. It is the biggest difference in favor of Labor over the Conservatives since 2001.

Furthermore, 72% of respondents, including 69% of Tory voters, disagree with the government’s move to scrap the top tax rate of 45% for the highest earners.

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