Sterling surrenders gains ahead of ‘tough but necessary’ UK budget

THE pound eased against the dollar on Thursday ahead of finance minister Jeremy Hunt’s new budget full of “tough but necessary” measures to control inflation.

Hunt, who took over from Kwasi Kwarteng who served as chancellor under former Prime Minister Liz Truss, plans to tackle a 55 billionpound ($65.7 billion) hole in Britain’s budget by freezing thresholds and allowances on income tax, national insurance, inheritance tax and pensions for a further two years.

Inflation in the UK shot up at a rate of 11.1 per cent in the year to October, the fastest increase since October 1981 and well above SEPTHE 10.1 per cent rate.

The expectation in the market is for Hunt to announce somewhere in the region of 40 to 50 billion pounds of total fiscal tightening over the coming couple of years.

“If that’s what we get, the market reaction should be fairly neutral. The risk to that view, I suppose, is that we get that magnitude of fiscal tightening, but more of it comes earlier,” RBC chief currency strategist Adam Cole said.

The question sterling traders will have to weigh up is whether tighter fiscal policy will return some credibility to UK markets, which should boost the pound, or whether a higher tax burden will hamper growth even further, thereby denting the currency, Cole said.

“For choice, I think it’s something which is probably something that is easier to play in gilts than it is in the currency. But if I had to jump one way or the other, I would say that tighter fiscal policy is more likely to play out as a fairly conventional cyclical story of ‘weaker growth, lower rates, weaker currency’,” he said.

Sterling was last down 0.3 per cent against the dollar at 1.188 dollars, having touched a session high of 1.1958 dollars earlier in the day, and was flat against the euro at 87.22 pence.