As local Treasury rates rose on Tuesday, the British pound rose from record lows. Attention is now firmly fixed on prospective policy moves by the Bank of England (BoE) to stabilize local currency markets.
After falling to a record low of $1.0327 on Monday, the pound increased 0.7% to $1.0764 by 22:38 ET (02:38 GMT). An abrupt decline in the value of the currency was mostly caused by worries about a fresh tax-cutting scheme. Last week, Britain’s largest package of tax cuts in 50 years was presented by Kwasi Kwarteng, the country’s new finance minister. The package was anticipated to be paid by higher borrowing. However, given the UK’s declining economy and twin deficits, traders scoffed at the proposition’s viability.
Kwarteng’s proposal was an attempt to support the economy, which is now struggling due to a combination of high inflation and rising interest rates. But the proposal also runs the risk of stretching the already stretched budget.
Here Is What Economists Predict
BoE Governor Andrew Bailey tried to calm the markets on Monday by promising that the bank will increase interest rates as much as required at its upcoming meeting. The statements, however, did nothing to strengthen the pound since they dispelled hopes that the BoE might implement an emergency rate rise.
Last week, the BoE raised interest rates by 50 bps, indicating that more tightening was necessary. However, the recent decline in the pound may cause the bank to accelerate rate increases further. Although any errors will probably be penalized heavily and they might not wait until November for the revised plan, it appears that markets are now giving sterling the benefit of the doubt.
Analysts also made assumptions about the potential strategies the British government may use to strengthen the pound. They highlighted the prospect of the administration reducing the projected tax cuts while ruling out an emergency rate rise. Another option is for the BoE to ease up on quantitative tightening, especially in light of the recent spike in gilt rates to more than decade-high levels.