Yesterday, the Bank of England decided to raise interest rates by 50 basis points as it reaches now 2.25%. It has already raised its rates seven times since last December, reaching 2.25% (compared to 0.75% of the ECB deposit rate). It undertook to continue this increase at each of its meetings until the end of the year. So much so that economists are betting on a key rate of 3.75% by mid-2023, while the financial markets are anticipating a rate of 5%. These expectations are reflected in the yield on ten-year British government bonds, which reached 3.45% on Thursday, up 0.15 points.
The Bank of England has recorded the probable entry of the United Kingdom into recession. After a slight decline in GDP in Q2, it expects a further drop of 0.1% in Q3, partly due to the mourning of HM Queen Elizabeth II. The central bank had previously forecasted an entry into recession in Q4, which should last for more than a year. Medium-term doubts about the British economy are contributing to a plunge of the pound as it remains at its lowest level since 1985 against the dollar.
This morning, Chancellor Kwasi announced a “mini-budget” for the UK government in which he announced the largest tax cuts since 1988 which is to be financed by a sharp increase in borrowing in the short term, as the UK has the 2nd lowest debt-to-GDP ratio in the G7.
The rise in national insurance decided by Rishi Sunak in April will be scrapped on the 6th of November. The Chancellor also announced plans to scrap planned corporation tax hikes (it was due to increase from 19% to 25% in April 2023), and an end to the cap on bankers’ bonuses (introduced by the European Union before Brexit to limit London’s attractiveness as a financial hub) and a cut on stamp duty in England and Northern Ireland (for first-time property buyers and occupation moves, for both individuals and businesses). The announcement also included plans to create low-tax zones around the UK.
The Chancellor also announced plans to fund infrastructure projects all around the United Kingdom, to boost the kingdom’s attractiveness for businesses but also create jobs and maintain unemployment at low levels.
Furthermore, the next 2 years the typical household bill will be capped at £2500 with a £400 rebate for all households this winter. Wholesale energy will also be subsidised to provide affordable energy prices for businesses, schools and pubs.
The goal is to reduce inflation by 5 percentage points, from the 9.9% currently and over 2% growth over the next year.
Cable remained stable despite the BoE’s interest rate hike as we awaited the chancellor’s mini-budget. GBPUSD opened at 1.1257 and closed at 1.1263.
GBPEUR followed a similar trend. The pair opened at 1.1451 and closed at 1.1447.
EURUSD also remained stable after falling by -1.33% the day before. The pair opened at 0.9832 and closed at 0.9839 yesterday.