Pound Sterling Hits Two-Week High of $1.14
The recent rally in Sterling is not a vote of confidence in Britain’s ability to fight inflation. It is just a sign that the recent rate hikes by the Bank of England have not yet had a negative effect on the global economy. A change in monetary policy will take about a year before it has a significant impact on the economy.
Kwarteng Brings Forward Debt-Cutting Plan
The chancellor of the United Kingdom, Kwasi Kwarteng, is bringing forward publication of his debt-cutting plan, which he has promised to publish on the same day as the Bank of England’s full forecast. But the move has raised doubts and triggered a sell-off of UK assets amid concerns about the size of government borrowing. Kwarteng’s move follows the surprise withdrawal of a plan to scrap the top rate of income tax. The plan to do so triggered an uproar among Conservative Party lawmakers and stirred up financial markets.
The pound has climbed back to $1.14 this week, from an all-time low of $1.03. The move is a bid to protect lenders from higher interest rates. However, the move is likely to make mortgages less affordable. This will push some people out of the mortgage market, while others may have their borrowing power reduced. Meanwhile, the escalating interest rates mean that the Bank of England’s base rate could rise as high as 5.5% by early summer next year.
As the pound rose to a two-week high against the dollar on Tuesday, rebounding almost 10% from its record low last week. The unfunded tax cuts have wrecked British assets, but Kwasi Kwarteng’s debt-cutting plan is expected to be unveiled earlier than planned. While he had previously said he would wait until the end of November, he is now expected to publish the details of the tax cuts in the coming weeks. A formal announcement is expected on Tuesday.
Market Expectations For UK Interest Rates Drop
The Bank of England recently raised interest rates for the seventh time in a row, the most since 2008. The rate had been hovering around 0% since 2008. On July 29, the Bank of England’s Monetary Policy Committee voted for a 0.5 percentage point rise, with three members voting for a higher 0.75 percent rise. One member voted for a lower 0.25 percent increase. This move comes against a backdrop of a weak pound.
The Bank of England will need to balance a range of factors, including weaker growth, lower inflation, and potential fiscal stimulus. The next interest rate decision is expected on 3 November. The Bank of England will also announce the future path of the UK’s economy. Regardless of what happens, the UK economy is in a vulnerable position.
The Bank of England’s monetary policy committee sets the benchmark interest rate for the United Kingdom. This rate is called the repo rate, and it applies to all open market operations. The MPC meets every six weeks to make decisions on interest rates, and the minutes are closely scrutinised by investors.
Sterling Rally May Not Be a Vote Of Confidence
Sterling has made a brief rally in recent days, gaining around a cent on Monday. This brings the pound back to its levels just before the mini-budget. However, the pound has taken a beating this month amid worries about the outlook for UK growth. On Tuesday, the closely watched business activity survey is due. It is likely that this will add more volatility to Sterling.
There are risks associated with this rally, including a forced dovish re-pricing of BoE expectations and the resurgence of Brexit-related fears. However, the downside risks are not imminent, and the pound is likely to retain momentum against the euro.
We Still Face The Risk Of More Market Turbulence
The British pound is facing a period of extreme volatility. It has already lost over 12% of its value against the dollar this year. A new report by the Office for National Statistics suggests that retail sales in August fell 1.6% month-on-month. This comes as the central bank warns that the UK is in recession and may face an economic slowdown.
The risk of further turbulence is still very high after the British government revealed plans to borrow more money to pay for tax cuts. The growth plan of the British government was compared to that of Ronald Reagan in the 1980s. As a result, the yield on the five-year government bond has increased by a full percentage point since Thursday.
We still face the risk that the UK government will continue to hike interest rates, resulting in higher borrowing costs for British citizens.
The new government in the UK is proving to be difficult to govern. Not only have they failed to implement the plans they had promised, but the UK has been hit by a crisis of confidence in its economic policies. This has led to the collapse in the pound and a rise in borrowing costs which is pushing the country into recession and threatening its housing market. In response to the crisis, the Bank of England has begun buying British government bonds to keep the currency stable.
Growing Fears Of A Housing Market Crash In the UK
Growing fears of a housing market crash in the UK are now on the minds of many buyers and homeowners. Rising interest rates and falling house prices have left many wondering if they can afford their mortgage payments. This trend has caused many mortgage lenders to pull out of the market.
The Bank of England is under pressure to raise interest rates. This will lower inflation and bring down the cost of consumer goods but will also make mortgages more expensive. In response to this, most big banks have withdrawn their lowest fixed-rate mortgage deals. A number of economists believe that a housing market crash could follow, pointing out that the current housing market is a lot like that of 2007 when the housing market crashed and led to the 2008 financial crisis.
There are numerous reasons why the housing market could crash in the UK. One of the main reasons is the fact that house prices are still too high and that there are fewer buyers than there are houses. This can leave homeowners stuck with a mountain of debt, increasing interest rates, and property that is worth considerably less than they paid for it.
Despite these reasons, the UK housing market has shown resilience despite economic uncertainty. However, recent industry surveys suggest that buyer demand is declining in most regions. Further, the Bank of England has reported that mortgage approvals are at their lowest levels in two years. Meanwhile, the most recent Halifax house price index also indicates a slowdown in growth. However, this slowdown is not yet complete.
First published by Digital Zeitgeist on 05.10.2022
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