Explainer: What caused the pound’s slump and will British travel, imports stay cheaper for Singaporeans?

SINGAPORE (Reuters) – The British pound fell to an all-time low of US$1.0327 (RM4.75) yesterday (September 27), prompting some Singaporeans to joke on social media that this was a good one Time for importing high value goods could be from UK.

Sterling is down 5 percent since Thursday and 21 percent this year on a backdrop of a strengthening US dollar. It has since recovered to $1.0683 by the start of yesterday’s trading.

The last time the pound was near $1.05 was in February 1985.

So how did the British pound, which was trading at just under S$2 against the Singapore dollar just over a year ago, fall so precipitously to around S$1.50 on Monday?

TODAY look closer.

What led to the pounding of the pound?

In short, economists told TODAY that it is mainly due to the market reacting to the new fiscal policy introduced under recently installed Prime Minister Liz Truss.

Investors began shedding the pound last Friday after Chancellor Kwasi Kwarteng, the UK’s chief finance minister, unveiled plans to cut taxes and big energy subsidies, among other things, to boost Britain’s ailing economy. The government plans to finance this through loans.

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Kwarteng then pledged over the weekend to further cut taxes in the new year, only adding to fears of a renewed surge in inflation as Britons will have more money to spend.

CIMB Private Bank economist Song Seng Wun described the move as “populist” as it would theoretically mean British citizens would pay less tax, have lower electricity bills and ultimately have more money in their pockets.

“It sounds reasonable if you have the means to sustain this expense and the loss of government revenue,” he said.

But with the UK government lacking the resources to do so, Selena Ling, chief financial officer and researcher at OCBC Bank, said the plan would require significant funding through an increase in gilt issuance, a form of borrowing.

Gilts are used by the UK government to raise money, usually to cover shortfalls between public spending and tax revenue.

British daily newspaper The guardAnalysts, quoted on Friday, reported that investors were “no longer willing to fund the UK’s current account deficit on the current configuration,” consequently prompting the sell-off.

What does this mean for Singapore?

OCBC’s Ling said for Singapore companies importing goods and services from the UK could benefit from the cheaper pound.

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“The same applies to Singaporeans who travel to the UK, buy property or send their children there to study,” she added.

However, for Singapore companies exporting to the UK, FX market volatility could be costly, Ling said, and any subsequent recession in the UK could also result in subdued demand in the near term.

Ling said, “So it’s kind of a double-edged sword.”

As for the prospect of cheaper British goods for Singaporeans, Song believes this will not last once sellers have cleared their existing stocks.

Due to the weaker pound, he said sellers of items priced in pounds will try to raise their prices as well to offset the fall in profits.

Referring to Singapore, which is an export-oriented economy, Song said there may be lower demand for its services overall due to higher prices.

He pointed out that the UK is not the only country to have seen its currency depreciate. This also applies to countries like Japan, Australia and even the European Union.

Will the pound recover?

Ling said the pace of the pound’s slide may have come as a surprise, but “it’s always like financial markets overreact.”

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However, both Ling and Song said markets are likely to remain jittery until investors get further clarity on the Bank of England and Kwarteng’s next moves.

After the slump, the Bank of England said it was paying close attention to financial markets, adding it would “not hesitate to change interest rates as much as needed” to curb inflation.

The Bank of England, like central banks around the world, has hiked interest rates several times this year in a bid to stem decades of inflation.

With sterling showing record weakness, analysts told AFP yesterday that they are forecasting a big rate hike when the Bank of England next meets for a regular policy meeting on November 3rd.

For his part, Kwarteng said he would present medium-term debt reduction plans on November 23, along with forecasts from the independent Bureau of Fiscal Responsibility showing the full extent of government borrowing.

However, Reuters news agency reported yesterday that the UK’s low investor confidence will only recover with a reversal of the economic plan announced by Kwarteng last week. – TODAY