The UK’s new Prime Minister, Theresa May, has taken the reins from David Cameron at a significant time for the country, as it prepares to leave the EU.
Temporary growthFollowing May’s appointment, the value of the British pound soared, having suffered badly in the wake of the Brexit referendum result.
Writing for
Business Insider, Will Martin reports that the growth was due to a sense of stability returning to the political landscape, which had been laced with uncertainty for weeks prior to the appointment.
The pound topped $1.32 for the first time since 4 July as May’s new position was confirmed and enjoyed its best day against the yen for almost three years.
However, Martin writes that sterling is “still hugely depressed against virtually all major currencies” following the vote to exit Europe, when it “fell off a cliff”.
He says that it is expected to continue to fall against most major currencies, with the most negative projection coming from former Pacific Investment Management Company executive Mohammed El-Erian, who estimates that it will plummet to breaking even against the US dollar.
Business Insider article
Pound surges on rate decisionHowever, the recent surprise decision by the Bank of England (BoE) to keep interest rates at the record-low level of 0.5% sent the pound surging, according to
Bloomberg’s Marianna Duarte De Aragao and Justin Yang. “Sterling gained versus all but one of its 16 major peers, touching the highest level versus the dollar in two weeks,” they said.
The news contradicts a recent
Bloomberg survey that found that 31 out of 54 economists had predicted a rate cut. “Futures pricing before the announcement showed the chance of a rate cut at 86%, compared with 11% on 23 June, the day of the nation’s referendum.”
31 out of 54
The number of economists that expected an interest rate cut, according to a survey by Bloomberg
The article concludes with a quote from Peter Frank, Global Head of Group-of-10 and Asian currency strategy at Banco Bilbao Vizcaya Argentaria SA in London: “It's certainly positive for the pound that the BoE felt that they need not cut [interest rates]. It’s a sign of near-term confidence that they can wait until August.”
Bloomberg article
Hammond’s challenge
Meanwhile, Britain’s new Chancellor of the Exchequer, Philip Hammond, “is in charge of the world's fifth-largest economy as it risks sliding into recession,” says David Milliken, writing for
Reuters.
“One of Hammond’s first tasks will be to decide whether he can afford to cut taxes or spend more to steer Britain’s economy through the aftermath of the Brexit vote,” says Milliken.
The UK’s budget deficit of over 10% of gross domestic product has halved since 2010, but Milliken says that economists predict the remainder will be “harder to tackle without cutting deeply into public services”.
According to Milliken, Hammond – former businessman involved in a number of sectors, including construction and oil and gas – will also need to reassure foreign banks that they will benefit from a continued presence in London, “despite the country’s uncertain relationship with the rest of the EU”.
Hammond has already assured the British Bankers’ Association that he will fight for its continued access to the EU’s single market.
Paul Johnson, Director of the Institute for Fiscal Studies, is reported to have said that the finance ministry was likely to play a key role in negotiating this access.
“The biggest question over the next three to four years by far is Britain’s relationship with the single market,” said Johnson. “In a sense, that is almost a bigger economic question than whether Britain is in the EU or not.”
Reuters article
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