Pound performs well against the odds as OBR growth downgrade to trigger BoE December rate cut
|Despite all the doomsaying prior to Wednesday’s budget announcement, the pound has performed quite well in the past couple of trading sessions. We attribute this surprisingly resilient showing to both a) the size of the fiscal headroom (more than double that afforded by the chancellor last year), and b) the lack of any real surprises in the tax announcements.
The fiscal headroom is important in that the greater buffer should limit the likelihood that Labour will need to hike taxes again this time next year.
Yet, with the bulk of the revenue coming from the three-year extension to the freeze in the income tax thresholds (which won’t kick in until 2028), it will be a good few years before this revenue is even realised - if at all should political pressure or an election defeat trigger a softening or a U-turn in this policy.
Our second reservation is the impact of the tax hikes on growth. A further £26bn a year burden on the taxpayer, on top of the £40bn imposed last year, slips a heavy chain around the neck of both businesses and households.
Unlike last year, the budget made practically no reference to growth, and the OBR’s average growth forecasts for the UK economy was cut by 0.3 p.p, to go with the sizable downgrade to the productivity projections. This has effectively dotted the i’s and crossed the t’s for a December rate cut from the Bank of England, which is now almost fully priced in by financial markets (92%).
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.