UK warned ‘utterly irresponsible’ policy could drive pound below dollar and euro parity – business


The German government is concerned that Britain is conducting a ‘major’ experiment, by cutting taxes and boosting borrowing just as the central bank is raising interest rates.

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German finance minister Christian Lindner raised doubts about the British government’s plans to accelerate spending while the central bank tightens policy to rein inflation.

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In another sign of rising international concern, Lindner warned:

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“In the UK, a major experiment is starting as the state simultaneously puts its foot on the gas while the central bank steps on the brakes,”

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Speaking last night, at an event hosted by the Frankfurter Allgemeine Zeitung newspaper, Lindner suggested that it wouldn’t end well….

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“I would say we wait for the results of this attempt and then draw the lessons.”

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Larry Summers, a former US Treasury secretary, has warned that the UK government’s ‘utterly irresponsible’ plans could drag the pound below parity against the euro, as well as the dollar.

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Summers has heavily criticised chancellor Kwasi Kwarteng for undermining credibility by saying ‘incredible things’ about planning more tax cuts — those weekend comments pushed the pound to a record low of $1.0327 on Monday.

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Summers says he was “very pessimistic about the consequences of utterly irresponsible UK policy on Friday,” but didn’t expect the markets to get so bad so quickly.

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Summers also suggests the Bank of England should have taken more decisive action, rather than its ‘timid’ statement yesterday.

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Summers says:

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The first step in regaining credibility is not saying incredible things. I was surprised when the new chancellor spoke over the weekend of the need for even more tax cuts.

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I cannot see how the BOE, knowing the government’s plans, decided to move so timidly.

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Summers pointed to surging interest rates of long-dated British debt as a “hallmark of situations where credibility has been lost”.

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n

“This happens most frequently in developing countries but happened with early Mitterrand before a U-turn, in the late Carter Administration before Volcker and with Lafontaine in Germany.”

n

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Summers warns that there could be global consequences from a currency crisis in the pound, as it is a reserve currency.

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n

The magnitude of Britain’s trade current account deficit underscores the seriousness of its challenges. My guess is that pound will find its way below parity with both the dollar and euro.

n

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Currently the pound is trading at €1.12, having hit €1.08 in yesterday’s crash, the weakest since the end of 2020.

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Here’s the full thread.

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Read More: UK warned ‘utterly irresponsible’ policy could drive pound below dollar and euro parity – business

2022-09-27 02:48:54

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