In the morning of September 26, Beijing time, the pound plummeted by more than 5% against the dollar at one point, and the lowest dropped to the 1.0224 level.
According to the data, in February 1985, the lowest GBP/USD was 1.0520. Based on this calculation, the GBP hit a new low in 37 years.
Since the beginning of this year, the exchange rate of the pound against the US dollar has shown a downward trend as a whole, and another round of rapid decline has started since September 12.
After the EUR/USD exchange rate fell below parity, the market is now highly concerned about whether the GBP/USD exchange rate will fall below parity level.
The tax cut plan announced by the British government last Friday caused market worries, and the British stock market and foreign exchange market all fell sharply.
The analysis said that investors' confidence in the British economy has fallen sharply, and their policymakers are full of doubts about solving the "stagflation" predicament.
The pound fell more than 22% against the dollar during the year
,
analysis said that the tax cut plan caused concerns about the British economy
On September 26, GBP/USD opened at 1.0816 and fell all the way down, once falling to the 1.0224 level.
Since then, the pound has rebounded, and as of 14:30 on September 26, Beijing time, it was reported at around 1.06.
At the same time, the US dollar index rose rapidly, jumping from the level of 113 to above 114, and the highest rose to 114.68 in the day.
Since the beginning of this year, the GBP/USD has generally shown a downward trend, from around 1.37 at the beginning of the year to around 1.06 at present, with 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, from around 1.16 to 1.06, a drop of nearly 1,000 basis points.
On Friday (September 23), the British government announced a massive tax cut plan to boost the economy.
According to the information on the UK government’s official website, the main measures of the plan include: canceling the plan to increase the corporate tax rate, keeping the tax rate at the lowest level in the G20 of 19%; reducing the basic tax rate of personal income tax by 1 percentage point one year ahead of schedule, that is, in April 2023 The monthly reduction to 19% means that the average annual income of 31 million people will increase by 170 pounds; stamp duty will be cut, the tax exemption will double from 125,000 pounds to 250,000 pounds, and 200,000 home buyers will not have to pay at all each year. stamp duty.
In addition, the British government has also launched an energy bill relief scheme, which will halve the cost of business energy bills, and the typical household will save 1,000 pounds per year on energy bills.
The UK government plans to set a medium-term economic growth rate target of 2.5%, with tax cuts estimated to total £45bn by 2026-2027.
Britain's finance minister, Kwasi Kwarteng, called the plan "the largest package in generations", saying the government wanted "a new approach in a new era focused on growth".
Critics of the plan, however, have warned that the combination of massive tax cuts and the government's plan to protect households and businesses from soaring energy prices would leave Britain with high debt as interest rates rise.
The energy support scheme is expected to cost more than £100bn over two years.
CICC analyst Liu Zhengning pointed out that tax cuts are an expansionary fiscal policy, which will not only support economic growth in the short term, but also push up inflation.
Tax cuts will also lead to fiscal deficits and increase the government's 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 showed that the result of this would be a decline in the credibility of the central bank to fight inflation, which would eventually lead to high inflation. From the experience of other emerging markets, it may even lead to hyperinflation.
In fact, since the end of last year, the Bank of England has begun to raise interest rates in response to inflation. At this time, the British government's introduction of tax cuts will be a huge challenge for the Bank of England.
On the day the tax cut plan was announced, the pound tumbled 3.7% against the dollar, its biggest one-day drop since the outbreak of the virus in March 2020.
U.K. stocks also fell, with the FTSE 100 down nearly 2 percent.
Liu Zhengning and others pointed out that if you are only worried about rising inflation and the central bank will raise interest rates more aggressively, the exchange rate of the pound will remain strong, but the sharp depreciation of the pound now shows that the market is worried that the Bank of England is difficult to deal with the current situation.
The performance of asset prices has shown that investors' confidence in the UK economy has fallen sharply, and they are full of doubts about its policy makers to solve the current "stagflation" predicament.
Will GBP/USD fall below parity as Bank of England maintains dovish rate hikes?
The UK economy is facing unprecedented challenges, and the UK macro policy sector is also faced with a dilemma between fighting inflation and maintaining economic growth.
The UK economy is one step closer to officially entering a recession.
Earlier data released by the Office for National Statistics showed that the UK's GDP contracted by 0.1% in the second quarter.
At the September monetary policy meeting, the Bank of England lowered its third-quarter GDP forecast to a decline of 0.1% from an increase of 0.4%.
If GDP growth in the third quarter is actually negative, it will be two consecutive quarters of contraction in the UK economy, 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 interest rate hike, raising the benchmark interest rate to 2.25%. This is the seventh interest rate hike by the Bank of England since December last year. It has risen to the highest level since the 2008 financial crisis.
Behind the rapid rate hikes is severe inflation.
In July this year, the UK consumer price index (CPI) rose by 10.1% year-on-year, the highest level in 40 years.
In August, the British CPI fell slightly, up 9.9% year-on-year, but it was still at a high level.
In addition, the core CPI after excluding food and energy rose by 6.3% year-on-year in August, which is still a further increase from the previous month.
The UK government has announced energy price safeguards on September 8, capping the price of energy for household units to no more than £2,500 on annual bills, starting in October for two years.
The government also provides support to consumers and businesses.
The Bank of England pointed out that the introduction of energy price safeguards means that the CPI will slow in the short term, and is expected to peak at just under 11% in October.
It also faces high inflationary pressures, but the Bank of England is more moderate than the Fed's rate hike rhythm.
The Fed has raised interest rates five times during the year, accumulatively raising interest rates by 300 basis points, of which three sharp hikes of 75 basis points in June, July and September.
Since the Bank of England started raising interest rates in December last year, it has raised interest rates by 215 basis points seven times, with the largest rate hike being 50 basis points.
Before the results of the September meeting were released, the market had expected the Bank of England to increase the rate of interest rate hikes to 75 basis points as the UK CPI data in August showed that inflationary pressures remained.
The end result showed that the Bank of England maintained a more dovish pace.
Yu Lu, an analyst at Societe Generale Research, pointed out that during the technical recession or recession period in the UK in history, except for the three consecutive quarters of GDP contraction starting in April 1975, the Bank of England still raised interest rates sharply to deal with the inflation rate close to 25%. In addition, the Bank of England has cut interest rates in the rest of the period.
It can be seen that when faced with the balance beam between 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 the fiscal year, inflation during the year has shown its peak.
Therefore, on the whole, it is difficult for the Bank of England to raise interest rates aggressively this year.
Will the more moderate pace of interest rate hikes by other central banks exacerbate the depreciation of the pound?
Yu Lu pointed out that the reason why the Bank of England took a relatively cautious stance was not only to stabilize the economy, but also to reduce the trade deficit by devaluing the currency.
Similar to the Bank of Japan's consideration, even if the pound remains strong, it will be difficult to stop the imported inflation caused by high oil prices, but currency depreciation can play a role in narrowing the trade deficit, thereby making up for the continued pressure of capital market capital outflows.
Moreover, oil prices have shown signs of peaking and falling in recent months, and British import prices have suspended their upward trend.
In the follow-up, the Bank of England is expected to continue to adopt a cautious tightening attitude, which means that the possibility of unexpected hawking is low, and the pound will continue to be weak, and will even fall further to parity.
In addition, if Brexit uncertainty returns, it will also hit the pound.