By Chris Biggs
International reaction following yesterday’s warning from the International Monetary Fund (IMF) that urged the UK to rethink their strategy sent the pound and markets to spiral.
It seems like the governments expectations for the mini-budget didn’t fully account for the retort with which it was met, particularly from certain sectors.
The announcement has sparked concern from industry leaders and the investment sector following a collapse in the value of the pound sterling considering the recent surge in the country’s borrowing costs.
The IMF’s response to the mini-budget is unusual considering the UK's status as a G7 nation and a leading world economy and this is seemingly what sparked much of said volatility.
Essentially, what many are suggesting is that the tax-cuts and mini-budget layed out contradict certain efforts from the Bank of England to keep inflation down.
Although incentivising growth is a very positive note for the private sector, consumers will continue to see rising prices, therefore there is speculation these efforts could cancel each other out.
The fall in the pound is going to impact the UK in many ways. A weaker pound means that costs for imported goods and services are more expensive, which means further price rises for consumers on essentials like food – which already skyrocketed to 10.6% today - considering roughly 45% is imported.
Consumers will also see a big impact on oil prices as it is an international commodity priced in USD, the fall in the value of the pound will mean that filling up your car with diesel and petrol will become more expensive.
The implications for the investment sector and businesses are different. Businesses were happy overall with cutting taxes - for exporters, a weaker pound makes them more competitive.
However, cutting taxes in this case has been called a “gamble”. Many businesses are looking for certainty.
There will be benefits in terms of growth regarding the mini-budget, however, the risk associated with this type of fiscal policy at a time of high inflation and even higher borrowing costs has resulted in a loss of over $500 billion in combined value from UK stocks and bonds since September 5th.
In what was already an uncertain time for investors and businesses following socioeconomic and geopolitical turmoil, the market speaks for itself when it comes to investor confidence into the UK.
The UK has mostly been regarded as a haven for safe investments, at the moment, this is not the case, for many companies this will result in less accessibility to necessary capital for growth.
Chris Biggs is CEO & Founder of Theta Global Advisors