Voters have been urged to punish PM Liz Truss following the sterling crisis that has been sparked by the mini-budget released last week by her chancellor Kwasi Kwarteng.
Labour party leader Keir Starmer said “Don’t forget. Don’t forgive. The only way forward is to stop this- with a Labour government.” Other Labour party leaders have said that the government has lost credibility and called for urgent action after extensive tax cuts to be founded by borrowing. Conservative MPs may vote down the finance bill that is forthcoming to show disapproval of the mini-budget and its consequences on the pound.
The sterling’s value has hit a historical slump following the government’s plans to increase borrowing and cut down on taxes. This has left markets uncertain and spooked. The chief economist of the Bank of England says the pound’s value will need “a significant monetary policy response” to get back on track.
The bank gave a warning on Monday of hiking interest rates “by as much as needed” to manage inflation as mortgage lenders started withdrawing deals for new customers and traders predicted that the interest rates may hit nearly 6 per cent next year, creating fears for future housing problems. The Bank continues to closely monitor developments in the financial market.
In its initial statement following the budget, the Bank of England said that its officials will make “a full assessment at its next scheduled meeting of the impact on demand and inflation from the governments, and the fall in sterling, and act accordingly.”
The bank may try to control rising prices on the market by increasing borrowing costs to deter people from borrowing more but encouraging them to spend less and save more. For house owners with no mortgage, interest rate changes may lead to changes in bank loans, credit cards and car loans. Lenders can increase the fees they charge for such services.
In a Tuesday meeting with City bosses on financial deregulation, Mr Kwarteng insisted that he was “confident” in the economic plan and said, “Our approach will work.” In his assuring words to asset management and insurance executives he said “we are confident in our long-term strategy to drive economic growth through tax cuts and supply-side reform. Supply-side reforms are critical- increasing capacity brings down prices. We are committed to fiscal discipline, and won’t reopen the spending review.”
Following the mini-budget released last week, the pound has seen an all-time low forcing the Bank of England to intervene. The sterling’s crash comes barely three weeks after Liz Truss become Prime Minister. Around the world, markets have reacted to this new budget that is heavily relying on borrowing, the highest borrowing costs for the pound in 20 years.
The Chancellor is expected to calm market fears of top Wall Street bankers on Wednesday. The pound crash has pushed the US Dollar up against other currencies on the market.
With mortgage products slumping from 3,961 to 3,596 since the mini-budget came out many people may be left stranded. A low-valued pound on the market means that the importation of commodities such as gas and oil will be more costly as these commodities are priced in dollars.
The Treasury has confirmed that it will on 23 November put out a medium-term fiscal plan that will come with a forecast from the Office for Budget Responsibility.
The fall of the pound will cause an increase in the price of goods and services that are imported into the UK. With a rise in the cost of importation for raw materials, food or parts, companies in the UK may pass the price to goods and services. With over 50% of imports of food, the UK must brace itself for tough times ahead.
With a push towards inflation, the cost of living will likely go up. With soaring gas and fuel prices following the war in Ukraine, households and businesses are already dealing with high electricity and gas bills. The Prime Minister has however outlined measures to deal with this potential problem. Diesel and petrol for car use will also see hikes.
On Monday the pound fell to $1.03 but regained ground and stood at $1.08 a record low in 50 years. More tax cuts are expected on top of the £45bn following Chancellor Kwarteng’s announcement. The Chancellor and Prime Minister have refused to comment on the fall of the sterling against the Dollar.
The new budget has outlined a £45bn tax cut with the government confirming that for the first six months it will spend £65bn on its subsidy scheme on rising energy bills of businesses and households.
A forecast of the UK’s economic outlook, future borrowing and debt has not been published following the Treasury’s refusal on Friday to publish a forecast by the Office for Budget Responsibility (an independent watchdog). The interest rate may triple in the next year even though the Prime Minister has promised to fund investment and improve productivity from extra cash realised after these news cuts.
Investors on the market are worried about the sustainability of the UK’s public finances and of the government ending with worsening debts in the long run if it takes up extra borrowing that may not be earned back by higher growth or improved tax receipts.
The pound has been fluctuating following announcements by the Bank of England about what it will do following the pound crisis to keep inflation under control.
When it first hit the $1.035 low the bank announced that it will not hold back on making changes to interest rates to keep inflation and there was hope in the market. This hope was dashed following the Banks next announcement that it had no intention of conducting a full assessment of the economic policy before its scheduled meeting in November causing another drop of the pound. In its next meeting, the bank will assess how the government announcement has impacted demand and inflation.
