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The pound sterling sinks to its worst level in half a century


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 Asian market has given the alarm signal, from the first hour of this Monday, of what is 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.

Hours before the Minister for the Economy, Kwasi Kwarteng, announced the tax cut and even promised that there would be more measures in this regard, the Bank of England had made the decision to raise the basic interest rate by half a point, to place it at 2.25%.

It was the response urgently demanded by many economists to deal with galloping inflation that currently stands at 9.9%.

Kwarteng went so far as to assure, in his appearance on Friday before the House of Commons, that aid to lower gas and electricity bills could alleviate the level of inflation by up to five percentage points.

Experts, however, point to a warming of economic activity, with government intervention at the least appropriate time.

The markets are already counting on a possible extraordinary meeting of the Bank of England's steering committee to assess further rate hikes.

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 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.

Source: elparis

All business articles on 2022-09-26

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News/Politics 2022-10-03T06:14:03.208Z

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