Market Update 26/09/2022 - The British Pound slumps to a new 37-year low!
Sterlings have been on a steep fall against the greenback this year. Following the new U.K. government announced its new economic plan to combat the crisis, it had another 3.33% slump against the dollar today compared to the last Friday, September 23, 2022, prior to the announcement.
The British Pound had dropped as low as $1.049 on September 26, 2022, against the dollar to a fresh 37-year low, adding fire to the losses after the measures were unveiled in the morning in London.
The fall came after the chancellor announced a £45B tax cut directed at the higher earners. The fears intrigued over the future path for the public finances triggered a surge in government borrowing costs.
Kwasi Kwarteng’s Mini Budget.
Mr. Kwarteng outlined the government’s plan to accelerate economic growth. Here are the 7 key takeaways announcements from the chancellor regarding the budget.
- The income tax rate for the richest — The chancellor scrapped the top rate of income tax as part of the biggest package of tax cuts in 50 years. Labour and some Tory MPs have said it was wrong to cut taxes for the wealthy during a cost-of-living crisis. He later emphasized said he was “being fair” by reducing taxes right across the income bracket.
- Basic income tax rate cut early — The previous prime minister, Boris Johnson had promised to cut the basic rate of income tax from 20% to 19% before the end of parliamentary in 2024. Kwarteng also announced that it would take place a year earlier, in April 2023. He said this would mean a tax cut for over 31M people.
- Demolished corporation tax rise — The planned increase of corporation tax to 25% will be cancelled. It will stay at 19%. This means businesses will pay less tax than they had been expecting.
- National Insurance — The increase in national insurance will be reversed starting on November 6, 2022. The 1.23% point increase in the tax was previously announced last April by former chancellor Rishi Sunak to help to fund health and social care.
- Bankers’ bonus — The bankers’ bonuses which were previously limited to twice a banker’s salary will also be cut in the wake of the 2008 financial crisis.
- Stamp duty cut — The level at which house-buyers begin to pay stamp duty has doubled from £125,000 to £250,000. First-time buyers currently pay no stamp duty on the first £300,000 and that threshold has been increased to £425,000.
“Sterling is in danger,” warned analysts at Deutsche Bank.
Soon after the announcement by the new chancellor of Exchequer, Kwasi Kwarteng, The FTSE 100, Britain’s benchmark stock index, fell 2%. The sweeping series of tax cuts on Friday, along with the high inflation path.
The plan emphasizes lowering the taxes for companies and workers as Britain’s government prepares to spend £60B in a span time of six months to subsidize energy costs for households and businesses, the first phase of an expansive plan to freeze the cost of gas and electricity for consumers.
However, when asked about the fall in sterling after the mini-budget announcement, Kwarteng said: “I don’t comment on market movements.”
“The market verdict was swift and negative”.
JP Morgan, the US investment bank, mentioned that the reaction towards the announcement exposed “a broader loss of investor confidence in the government’s approach”. The plans will require significant increases in government borrowing. It will later raise the expectations for the Bank of England to stop inflation by increasing interest rates.
“We think the UK will find it increasingly difficult to finance this deficit amidst such as deteriorating economic backdrop; something has to give, and that something will eventually be a much lower exchange rate,” said Citi analyst Vasileios Gkionakis (Reuters).
Euro is down against the dollar. Dropping 1.5% to $0.97 on Friday, September 26, 2022, after the release of September’s Euro zone’s purchasing managers’ index fell to 48.2. The currency further slides to $0.968 on September 26, 2022.
S&P Global mentioned the likelihood of a recession. The negative reaction to the pound with the rise of the euro by 2% against sterling to £0.89.
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