(Singapore, 28/09/2022) Following an announcement by the Chancellor of the Exchequer Kwasi Kwarteng, the United Kingdom’s chief finance minister, of plans to cut taxes and provide huge energy subsidies last Friday, in an attempt to boost the weak UK economy, a pound sell-off has sent the pound plunging to a record low of US$1.0327 on Monday (September 27), before bouncing back to US$1.0683 at the start of the trading day on Tuesday. The new fiscal policies are implemented under recently-installed Prime Minister Liz Truss.
In Singapore, response to the weakened pound on the ground has been mixed. As reported in local media, while some money changers have seen an increased demand for the pound, others have not seen a significant uptick. In fact, it was the surge in demand for the Japanese yen when the currency fell last week which saw some changers running out of yen by Saturday midday. Changers also see wider demand for the Euro, ringgit and Thai baht.
In the short term, Singapore businesses which import goods and services from the UK may benefit from the cheaper pound, similarly for leisure travelers, students and UK property investors. However, such benefits may be short-lived once sellers have cleared their existing stock. Sellers may then raise their prices to make up for their profit shortfall.
And Singapore businesses which export to the UK may see reduced demand for their goods and services.
For most Singapore-listed real estate investment trusts and companies, analysts do not expect the impact to be severe due to their limited exposure to the UK economy and increased hedging.
Analysts told the AFP news agency on Tuesday that they are forecasting a huge rate increase at the Bank of England (BOE)’s next regular policy meeting on November 3.
Mr Kwarteng had also said that he would be setting out medium-term debt-cutting plans on November 23, alongside forecasts from the independent Office for Budget Responsibility showing the full scale of government borrowing.
If the UK government is unable to maintain inflation over the medium term with their new fiscal policies, former U.S. Treasury Secretary Larry Summers told CNBC: “Financial crisis in Britain will affect London’s viability as a global financial centre so there is the risk of a vicious cycle where volatility hurts the fundamentals, which in turn raises volatility.”
“A currency crisis in a reserve currency could well have global consequences. I am surprised that we have heard nothing from the IMF.”
U.S. Federal Reserve official Raphael Bostic, president of the Atlanta Fed, similarly told The Washington Post that Kwarteng’s tax cuts had increased economic uncertainty and raised the probability of a global recession.