Pound ‘sell’ on inflation concerns
Global financial turmoil fuels strong dollar
“Not enough to ease market unrest”
Leeds Truss (Photo) The British cabinet withdrew ten days after announcing a massive tax cut that triggered a slump in the pound and chaos in global financial markets. Shortly after the withdrawal, the pound rose slightly, but there are concerns that inflation and national debt could at any moment trigger a UK crisis.
UK Treasury Secretary Quazi Kwateng posted a statement on Twitter on the 3rd (local time) saying, “We have decided not to push for the abolition of the 45% (income) tax rate.” “Growth initiatives to support businesses and reduce the tax burden on low-income families were a new approach for a more prosperous economy,” said Quateng.
“The focus now is on building a high growth economy that funds world class public services, raises wages and creates opportunities across the country,” Truss tweeted. Earlier, on the 23rd of last month, the Truss Cabinet announced a tax cut, the biggest tax cut in 50 years. The key was to remove the 45% income tax rate on people earning more than £150,000 a year.
However, as inflation rose to its highest level in 40 years, the Bank of England (BOE) took a ‘big step’ (a 0.5 percentage point increase in the key interest rate) and tightened fiscal policy while contradicting tax cuts which was actually loosening money. in the market he came out, fell into anxiety. Investors dumped the pound on speculation that a fall in tax revenue could worsen the fiscal crisis and put the UK’s national debt in an insolvency crisis. The exchange rate of the pound against the US dollar fell to a record low of $1.03 on the 26th of last month. This accelerated the strengthening of the dollar and threw the global financial markets into chaos. There was also strong opposition to the ‘rich tax cut’, which only benefits the high income class. Nevertheless, Prime Minister Truss made it clear on the 29th of last month that he would stick to the tax cuts. The next day, the international credit rating agency Standard & Poor’s (S&P) downgraded the UK sovereign credit rating outlook from ‘stable’ to ‘negative’. It is interpreted that the decision was made to ‘turn around’ as a crisis theory emerged that the cabinet could collapse and criticism was raised even within the Conservative Party.
Immediately after the withdrawal of the tax cut on the 3rd, the exchange rate of the pound against the dollar rose to $1.1263, but fell again. The 10-year UK Treasury yield, which rose to 4.6% last week, fell 0.07 percentage points during the day to 4.02%. On the other hand, the UK’s FTSE 100 fell 0.8% in the early trading session. Bloomberg said that the withdrawal of the tax cut alone was not enough to calm concerns about the depreciation of the pound.
Paris = Correspondent Jo Eun-ah achim@donga.com
