"Tax Cut Panic" caused the pound and British bonds to experience "Black Friday", and once again caused the market to suffer an epic critical hit this Monday!
htmlOn Monday, September 26, the pound fell sharply, falling 3.32% to 1.0488 during the day, and fell 4.5% at one point, hitting a new low since 1985 and down 11% this quarter. euro rose above 0.90 for the first time since January 2021.
According to CICC's analysis, the reason why the market has huge concerns about this tax cut is that the largest tax cut plan of the UK government in half a century may increase the fiscal deficit and intensify the market's concerns about the UK's "fiscal dominance" and inflation risks. History shows that "fiscal dominance" will weaken the credibility of the central bank, and ultimately trigger high inflation and even hyperinflation.
British think tank Resolution Foundation said that The tax cut plan means that the UK government will borrow an additional £400 billion in the next five years.
However, in the face of external concerns, not only did the British Deputy Finance Minister "not be surprised by the changes", emphasized that "the payment interest rate of British government bonds is currently roughly the same as that of the United States", and "the reason for our implementation of tax cuts is not to cope with intraday fluctuations in the foreign exchange market." The new British Prime Minister Tras will also plan more tax cuts next year.
Next year's tax cut plan is planned to "go in line with multiple lines"
Media said that the new tax cut measures will include further reductions in income tax. Specifically, citizens with incomes of more than 100,000 pounds may be exempted from personal income tax , and the highest income group can receive 5,000 pounds of tax exemption for each year.
And, the UK government may cancel the fees imposed on parents or guardians who earn more than £50,000 and apply for child benefits.
In addition, the British government will also review the life and annual allowances of pensions to avoid citizens falling into the "pension tax trap" and leading to early retirement. This move will benefit 1.6 million people.
UK citizen savers must pay 55% tax on pensions worth more than £1 million, which is called the "pension tax trap" and prompts many to choose to retire early.
Deutsche Bank said at the beginning of the month: In the worst case, the pound needs to depreciate by 15%
Although the pound fell to a new low since 1985, Deutsche Bank pointed out that it may not have bottomed out.
Previous article pointed out that due to the possibility of a deficit of nearly 10% in the current account, the UK is facing an increasing risk that it can no longer attract enough foreign capital to maintain foreign revenue and expenditure. If so, the pound will need to depreciate significantly to fill the gap in external accounts, in other words, a typical emerging market currency crisis will occur.
Early this month, Deutsche Bank estimated that in order for the UK's trade deficit to return to the 10-year average, the worst-case trade-weighted pound (measure the value of the pound relative to certain currencies most important to international trade) must depreciate by another 15%.
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