On the morning of September 26, Beijing time, the pound plunged by more than 5% against the US dollar, and fell to a low of 1.0224. Data shows that in February 1985, the lowest pound against the US dollar was 1.0520. Based on this calculation, the pound hit a new low in 37 years.

pounds. Photo/IC photo

On the morning of September 26, Beijing time, the pound plunged by more than 5% against the US dollar, and fell to the lowest level to 1.0224. Data shows that in February 1985, the lowest pound against the US dollar was 1.0520. Based on this calculation, the pound hit a new low in 37 years.

Since the beginning of this year, the pound sterling exchange rate against the US dollar has shown a downward trend overall, and has started another rapid decline since September 12. After the euro fell below parity against the dollar, the market is currently paying close attention to whether the pound against the dollar will fall below parity level.

The tax cut plan announced by the British government last Friday caused market concerns, and both the British stock market and foreign exchange market fell sharply. Analysts said investors' confidence in the UK economy is declining sharply, and they are full of doubts about its policy makers' solution to the dilemma of "stagflation".

pound fell more than 22% against the US dollar this year. analyzed that the tax cut plan caused concerns about the UK economy

html On September 26, the pound fell all the way against the US dollar after opening at 1.0816, and fell to the 1.0224 level at one point. Since then, the British pound has rebounded, and as of 14:30 Beijing time on September 26, it was around 1.06. At the same time, the index showed a rapid rise, jumping from the 113 level to above 114, and rose to a high of 114.68 intraday.

Since the beginning of this year, the pound has generally shown a downward trend against the US dollar, falling from around 1.37 at the beginning of the year to around 1.06 at the current time, and has accumulated a cumulative decline of more than 20% since the beginning of the year. Among them, on September 12, the British pound began a rapid decline, falling by more than 8% in 11 trading days, rapidly falling from around 1.16 to the level of 1.06, down nearly 1,000 basis points.

Last Friday (September 23), the British government announced a large-scale tax cut to boost the economy. According to the official website of the UK government, the main measures of the plan include: canceling the plan to raise corporate taxes to keep the tax rate at the lowest level of 19% in G20; lowering the personal income tax rate by 1 percentage point one year ahead of schedule, that is, to 19% in April 2023, which means that the average annual income of 31 million people will increase by 170 pounds; reducing stamp duty, the exemption amount will double from 125,000 pounds to 250,000 pounds, and 200,000 home buyers will not have to pay stamp duty at all each year.

In addition, the UK government has also launched an energy bill relief plan, which will cut the cost of corporate energy bills by half, and a typical household will save £1,000 in energy bills every year.

The UK government plans to set the medium-term economic growth target at 2.5%, and estimates that the total tax cuts will reach £45 billion by 2026-2027.

UK Finance Minister Kwasi Kwarteng called the plan "the largest package in generations", saying the government hopes to "take a new approach in a new era focused on growth". However, critics of the plan warn that the combination of massive tax cuts and government plans to protect households and businesses from the shock of soaring energy prices will leave Britain with high debt as interest rates rise. The energy support scheme is expected to cost more than £100 billion in two years.

CICC analyst Liu Zhengning pointed out that tax cuts are expansionary fiscal policy , which will not only support economic growth in the short term, but also push up inflation. Tax cuts will also bring about fiscal deficits and increase government debt burden. A deeper concern is "fiscal dominance", that is, monetary policy maintains low interest rates in order to reduce fiscal pressure. The experience of the United States in the 1970s shows that the result of this will be the decline in the creditworthiness of the central bank's anti-inflation resistance, which will eventually lead to high inflation. According to the experience of other emerging markets, it may even trigger hyperinflation. In fact, since the end of last year, the Bank of England has begun hiking interest rates in response to inflation. At this time, the British government introduced tax cuts, which will be a huge challenge for the Bank of England.

On the day the tax cut plan was announced, the pound fell 3.7% against the US dollar, setting the largest single-day drop since the outbreak of the epidemic in March 2020. The UK stock market also fell, with the FTSE 100 falling nearly 2%.

Liu Zhengning and others pointed out that if they are just worried about rising inflation and the central bank's interest rate hikes are more radical, then the pound 5 exchange rate will still remain strong, but the sharp depreciation of the pound now shows that the market is worried that the Bank of England will find it difficult to cope with the current situation.The performance of asset prices has shown that investors' confidence in the UK economy is declining significantly, and they are full of doubts about its policymakers' solution to the current dilemma of "stagflation".

The Bank of England maintains a moderate rate hike. Will the pound fall below par against the US dollar?

The UK economy is facing unprecedented challenges, and the UK's macro-policy sector is also facing a dilemma between fighting inflation and ensuring economic growth.

The UK economy is only one step away from officially entering recession. Previously, data released by the UK's National Office for Statistics showed that the UK's GDP shrank by 0.1% month-on-month in the second quarter. At the September monetary policy meeting, the Bank of England lowered its third-quarter GDP forecast from its original growth of 0.4% to a decrease of 0.1%. If GDP actually does have negative growth in the third quarter, it will be a contraction in the UK economy for two consecutive quarters, which is in line with the definition of recession.

The day before the tax cut plan was announced (September 22), the Bank of England announced a 50 basis point rate hike, raising the benchmark rate to 2.25%, which is the seventh rate hike since December last year, and the benchmark rate has risen to its highest level since the 2008 financial crisis.

The rapid rate hike is severe inflation. In July this year, the UK Consumer Price Index (CPI) rose 10.1% year-on-year, the highest level in 40 years. In August, the UK CPI fell slightly, up 9.9% year-on-year, but was still at a high level. In addition, the core CPI after excluding food and energy rose by 6.3% year-on-year, which is still further improving from last month.

The UK government has announced energy price safeguards on September 8, limiting household energy prices to the annual bills of no more than £2,500, starting in October for two years. The government also provides support to consumers and enterprises. The Bank of England pointed out that the introduction of energy price safeguards means that CPI will slow down in the short term, and is expected to peak slightly below 11% in October.

also faces high inflation pressure, but compared with the rate hike of the Federal Reserve , the Bank of England is more relaxed. The Federal Reserve has raised interest rates five times this year, with a total of 300 basis points, of which three consecutive major interest rate hikes in June, July and September were 75 basis points. Since the Bank of England launched interest rate hikes in late December last year, it has accumulated a total of 215 basis points in seven interest rate hikes, with the maximum interest rate hikes of 50 basis points. Before the results of the September meeting were released, the market expected the Bank of England to increase its interest rate hikes to 75 basis points, as the UK's August CPI data showed inflationary pressure still existed. The final result showed that the Bank of England maintained a relatively moderate pace.

Industrial Research analyst Yu Lu pointed out that in the history of the UK's technical recession or recession period, except for the Bank of England still hikes interest rates sharply to cope with the inflation rate close to 25% during the three consecutive quarters of GDP shrinkage that began in April 1975, the Bank of England has adopted interest rate cuts in the rest of the period. It can be seen that when facing a balance beam of stabilizing the economy and controlling inflation, the Bank of England is more inclined to choose to keep the former. At the same time, with the help of finance, inflation has shown its peak this year. Therefore, overall, it is unlikely that the Bank of England will implement aggressive interest rate hikes this year. Will

, which is more eased compared to other central banks, exacerbate the depreciation of the pound? Yu Lu pointed out that the reasons why the Bank of England took a relatively cautious position, in addition to the factor that focuses on stabilizing the economy, may also mean that the depreciation of the currency may converge the trade deficit of . Similar to the Bank of Japan's considerations, even if the British pound remains strong, it will be difficult to stop the imported inflation caused by high oil prices. However, currency depreciation can play a role in narrowing the trade deficit, thereby making up for the pressure of continued outflow of funds in the capital market. Moreover, oil prices have shown signs of peaking and falling in recent months, and UK import prices have temporarily suspended their upward trend. The Bank of England is expected to continue to adopt a cautious tightening attitude, which means that the possibility of unexpected eagles is low, and the pound will continue to be weak and will even fall further to parity. In addition, if Brexit uncertainty rebounds, it will also hit the pound.

Beijing News Shell Finance Reporter Gu Zhijuan Editor Xu Chao Proofreading Liu Baoqing