SINGAPORE, Sept 28 — The British pound sank to an all-time low of US$1.0327 (RM4.75) yesterday (September 27), prompting jokes amongst some Singaporeans on social media that this might be a good time to import high-end goods from the United Kingdom.
The sterling has slumped 5 per cent since Thursday and 21 per cent this year against a backdrop of an ever stronger US dollar. It has since bounced back to US$1.0683 at the start of the trading day yesterday.
The last time the value of the pound was anywhere near US$1.05 was in February 1985.
So how did the British pound, which was trading close to S$2 against the Singapore dollar just over a year ago, fall so steeply to around S$1.50 on Monday?
TODAY takes a closer look.
What led to the pound’s pounding?
In short, economists told TODAY that it is mainly a result of the market reacting to the new fiscal policies implemented under recently-installed Prime Minister Liz Truss.
Investors began dumping the pound last Friday after Chancellor of the Exchequer Kwasi Kwarteng, the UK's chief finance minister, set out plans to slash taxes and big energy subsidies, among other things, in a bid to kickstart the ailing British economy. The government plans to fund this by borrowing money.
Kwarteng then pledged over the weekend to cut taxes further in the new year, which only served to heighten fears of inflation rising again given that Britons will have more money to spend.
CIMB Private Bank economist Song Seng Wun described this move as a “populist” one since it would, in theory, mean that British citizens would pay less taxes, have lower utility bills, and ultimately, more money in their pocket.
“It sounds sensible, if you have the funds to be able to support that spending and the loss in government revenue,” he said.
But because the British government lacks the funds to do so, Selena Ling, head of treasury and research at OCBC bank, said the plan would require substantial funding through increases gilt issuance, a form of borrowing.
Gilts are used by the UK government to raise money, usually to cover shortfall between public spending and income from taxes.
British daily The Guardian, quoting analysts on Friday, reported that investors were “no longer willing to fund the UK’s external deficit position at the current configuration”, which consequently led to the sell-off.
What does it mean for Singapore?
OCBC’s Ling said that for Singapore, businesses which import goods and services from the UK may benefit from the cheaper pound.
“Ditto for Singaporeans who are travelling to the UK, buying property, or sending their children to study there,” she added.
However, for Singapore businesses which export to the UK, Ling said the foreign exchange market volatility may be costly, and any ensuing UK recession may also mean dampened demand conditions in the near-term.
Said Ling: “So it is a double-edged sword of sorts.”
On the prospect of cheaper British goods for Singaporeans, Song believes this will not last once sellers have cleared their existing stock.
Because of the weaker pound, he said sellers of items priced in pounds will be looking to raise their prices as well to make up for the shortfall in profits.
As for Singapore, which is an export-orientated economy, Song said it might see less demand for its services due to the higher prices all around.
He pointed out that the UK is not the only country that has witnessed a drop in its currency’s value. So too have countries such as Japan, Australia and even the European Union.
Will the pound recover?
Ling said the pace of the pound’s slump may have come as a surprise, but “it is always like financial markets to over-react”.
However, both Ling and Song said that the markets are likely to remain nervous until investors get further clarity on the next moves by the Bank of England and Kwarteng.
After the plunge, the Bank of England said it was playing close attention to financial markets, adding it would “not hesitate to change interest rates by as much as needed” to curb inflation.
The Bank of England, like central banks around the world, has hiked interest rates a number of times this year in a bid to cool decades-high inflation.
With the pound showing record weakness, analysts told the AFP news agency yesterday that they are forecasting a big rate increase when the Bank of England next meets for a regular policy meeting on November 3.
For his part, Kwarteng said he would set out medium-term debt-cutting plans on November 23, alongside forecasts from the independent Office for Budget Responsibility showing the full scale of government borrowing.
That said, Reuters news agency reported yesterday that rock-bottom investor confidence in Britain will only recover with a U-turn of the economic plan that Kwarteng announced last week. ― TODAY
