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The Bank of England and the Truss Government intervene to stop the collapse of the pound

2022-09-26T16:34:59.059Z

The tax reduction plan announced on Friday by the Government of Liz Truss worries the markets, which do not see the level of debt that it will entail as sustainable



The markets were crying out for it throughout Monday, and the Bank of England (BoI) has decided to intervene.

In an emergency statement, the British monetary authority has assured that "it will not hesitate to change interest rates if it deems it necessary."

Last week, the institution's Monetary Policy Committee raised the price of money by half a point, to 2.25%.

It wasn't enough to calm my nerves.

Many analysts now suggest that rates could reach a level of 6% by November, and are betting on an extraordinary meeting of the BdeI before the one scheduled for the middle of that month, although the statement rules out that possibility.

”We will carry out a complete evaluation, in the next meeting already scheduled,

of the impact on demand and inflation of the announcements made by the Government, as well as the fall of the pound, and we will act in accordance with all of this”, the entity assured, in an attempt to convey calm.

Along with the BdeI statement, the Ministry of Economy has published another parallel in which it reaffirms its rigor in managing the accounts and promises to present a plan in mid-November to reduce the level of indebtedness in the medium term.

The Asian market had given the alarm signal, from the first hour, of what was anticipated as a week of vertigo for the pound sterling.

The British currency has already collapsed to values ​​unknown since 1971 in its price against the dollar.

The low level of exchange in that market triggers volatility, and in the first European operations the pound remained somewhat firmer, but practically at parity with the US currency.

Regarding the euro, the pound also saw its price reduced to levels similar to those of September 2020, a clear sign that the turbulence experienced around the currency since this Friday does not respond only to the global strength of the dollar, but to the problems arising from the British economy.

The new government of Liz Truss announced at the end of last week the largest tax cut approved in the United Kingdom in more than 50 years.

A generalized tax relief that includes companies, individuals and even social contributions and asset transfers, and which, combined with the more than 150,000 million euros committed in direct aid to businesses and households to face the current energy crisis, anticipates a level of indebtedness that the markets consider unsustainable.

The current strength of the dollar is a major cause in all these turmoil, but not only.

"In the case of the pound, everything has been exacerbated by the government's announcement of new tax cuts, a clearly inflationary measure," Peter Escho, founder of the Wealthi investment firm, told the BBC.

"The approved energy consumption subsidies, and the news of an extraordinary meeting of the Bank of England, have added to create a certain sense of panic," he added.

The current strength of the dollar is the main cause of all these turbulences, but not the only one.

"In the case of the pound, everything has been exacerbated by the government's announcement of new tax cuts, a clearly inflationary measure," Peter Escho, founder of the Wealthi investment firm, told the BBC.

"The approved energy consumption subsidies, and the news of an extraordinary meeting of the Bank of England, have added to create a certain sense of panic," he added.

The risk premium on five-year bonds issued by the British Treasury has risen 40 basis points on Monday, to 4.503%, the highest level since October 2008. A decade of austerity contained the value of the pound, at the cost of a serious increase in inequality in the UK.

The measures announced by the new Conservative Executive, denounced by the Labor opposition as unnecessary aid to the richest, predict a long winter of social unrest.

The Government's Response

How to be defiant and humble at the same time?

The new Economy Minister, Kwasi Kwarteng, had anticipated, through several interviews over the weekend, that he would maintain the tax cut, already calculated at some 50,000 million euros, and that he would add reductions in other taxes.

The markets have not liked at all an arrogant tone that did not respond to his main concern: the unsustainability of the debt.

Given the semi-panic reaction experienced on Monday morning, Kwarteng has tried the difficult balance of reaffirming his promises and transmitting calm, with the promise that the new government will maintain the rigor in the accounts that the Conservative Party is supposed to.

“The Minister of Economy will present his Mid-Term Fiscal Plan on November 23.

The Truss government had even rejected the offer of the Office of Budget Responsibility (OBR, in its acronym in English) to prepare a previous analysis, which would calculate the impact on the public accounts of the tax cut that they were about to announce last Friday. .

They did not want messages of caution to water down a measure so loaded with ideology, so much to the liking of the hard wing of the Conservative Party and so allegedly brave as a tax cut of dimensions unknown in more than fifty years.

In the new statement, the ministry promises to accompany the November 23 announcement with the rigorous report from the OBR.

Labor responds

The storm unleashed on the pound sterling has caught the opposition of the Labor Party in Liverpool, where it holds its annual conference.

The formation accuses the conservative government of Liz Truss of resorting to an outdated economic formula, such as that of the neoliberalism of Ronald Reagan and Margaret Thatcher, and of favoring the richest with its tax cuts.

At the moment, the Labor spokesperson for the Economy, Rachel Reeves, has announced that her formation, if she comes to power, will reverse the decision announced last Friday to lower the maximum rate of 45% of personal income tax on the highest incomes.

“With a Labor government, those at the top will pay their fair share.

The 45% rate is going to come back, and we will use that money to double the number of nurses who train each year," Reeves promised.

Labor is willing, however, to maintain the announced reduction in the basic rate of personal income tax, from 20% to 19%, but they have already made it clear that they do not like the idea of ​​sustaining the almost 150,000 million direct aid to homes and companies, to face the energy crisis, with more indebtedness.

They undertake to tax again, in an extraordinary way, gas and electricity companies for their "profits from heaven".



Source: elparis

All business articles on 2022-09-26

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