The Pound has hit an all-time low against the US dollar after Chancellor Kwasi Kwarteng promised additional tax cuts over the weekend on top of the largest tax breaks in 50 years he unveiled in Friday’s mini-budget.
Investors are devaluing the sterling as a result of their assumption that the UK government is unlikely to pay off its debts at a time when the Bank of England won’t hike interest rates beyond what the investors need. Rising debt costs in the UK coincide with the weakening of the pound; as investors sell UK bonds, yields have climbed substantially.
The UK government announced it would cut taxes at a time when it has dramatically increased expenditure to cap energy bills for individuals and businesses, prompting a selloff in both the currency and bonds. According to analysts, this approach makes it inevitable that the government won’t be able to borrow the amounts of funds required to achieve its objectives.
On a global scale, the dollar has emerged as the clear currency winner as investors have sought shelter from worsening economic conditions. Imports of commodities priced in dollars, including oil and gas, have thus become more expensive.
Approximately a year has now passed since the pound began to decline.
This is due in part to the US Federal Reserve’s efforts to manage rising prices by raising interest rates and reducing the number of dollars, which has made the US dollar stronger, as well as the fact that the UK’s economy does not appear to be poised for strong growth given its exposure to high gas prices and post-Brexit issues.
What does it mean for South Africa?
The South African Reserve Bank announced a further significant rate hike last week, following other central banks, putting its primary lending rate almost to pre-COVID levels. As with most emerging market currencies, the rand is particularly subject to global variables like the U.S. monetary policy. Major economic indicators fell as a result, especially those that were consumer-oriented ones, as the increase raised already exorbitant living expenses. Gains for the Rand were however limited by worries about domestic power.
Following many power plant failures, state utility Eskom issued a warning that it might be necessary to apply “record” levels of load shedding.
A weak pound makes it cheaper for South African-based companies to pay for their imports and risks pushing down the rising costs of sending money or payments to family (remittance) even further.
Compared to this time last year, the rand is around 6% stronger against the pound and it does look set to continue to tread higher in the short term.
As of 5:10 pm the rand is currently trading at R19,33 to the Pound.
What can we expect in the short term?
UK inflation, the rate at which prices rise, is already rising at its fastest rate for 40 years and Some economists had predicted the Bank of England would call an emergency meeting in the coming days to raise interest rates in a bid to stem the fall, as well as calming rising prices.
The bank rate was predicted to reach somewhere around 3% a few months ago, then 4% last month.
It was 5% as of last Friday although various sources have claimed that the Bank of England could call for an increase in interest a full month before the scheduled meeting on 5 November 2022. This amount of uncertainty will definitely add to fluctuations in the world market.
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