OPINION
Market Rating Before FOMC MeetingJan 31
Pound Returns From Historic Low: Will Recovery Be Permanent?
The pressure that started with the cabinet reshuffle in the pound intensified last week. The fact that the Bank of England (BoE) raised the policy rate by 50 basis points to %2.25 at its meeting on September 22 and reduced the gross domestic product (GDP) growth expectation from %0.4 to minus %0.1 in the meeting text, pointed out that the recession in the country started in the third quarter and brought strong sales to the pound.
One Step Back: One Step Back: In its August monetary policy meeting, the BoE predicted that the economy would contract in the third quarter and technically go into a recession in the fourth quarter.
Subsequently, the losses in the pound deepened when the British Finance Minister Kwasi Kwarteng announced the main lines of the most comprehensive tax cut policy of the last 50 years promised by the new government in parliament.
Kwarteng, the Minister of Finance, underlined that they will reduce the taxes of businesses in the designated tax zones for 10 years and will introduce an ambitious financial services reform during the year while informing that the natural gas and electricity price subsidy for households and businesses will be around 60 billion pounds in the next 6 months.
Minister Kwarteng pointed out that they will continue to review tax systems to make them simpler and more dynamic while announcing that they will reduce income taxes by %5 for households and cancel the corporate tax increase left by the former government.
With the tax cut package announced by Kwarteng, on September 23, the pound, which closed with a %3.70 loss at 1.0844, dropped to its lowest level since 1985. Then, on Monday, with sagging sales, GBPUSD fell as low as 1.0356 and hit a historical low.
After the pound dropped to the bottom, the BoE and BoE Chairman Andrew Bailey made consecutive statements. While the BoE announced that they will evaluate the depreciation of the pound and the new fiscal plan at its next monetary policy meeting, BoE Chairman Bailey stated that they will not hesitate to change interest rates as necessary to return inflation to the %2 target in a sustainable manner in the medium term.
In addition, sources close to the subject stated that they expect the bank to hold an extraordinary meeting and raise interest rates there. We have seen the pound recover somewhat with the effects of these. The pound, which rose to the level of 1.0837 with an increase of about %5 from the bottom point, is momentarily priced at 1.0820 levels.
It is clear that the British government is struggling with both recession and inflation rates that are at their peak. However, it is seen that many officials, especially BoE Chairman Bailey, remain determined to reduce inflation rates to %2 in the medium term. This casts a shadow over the coordination of monetary and fiscal policy.
Unless a new story is presented to the markets in the recession-inflation equation, the pressure on the pound is likely to continue. On the other hand, it should be added that the dollar, strengthened by the aggressive stance of the FED, which guides the global markets, also complicates the recovery efforts of the pound.
