Deficit up as currency markets await Bank of England news

22 October, 2014

Robin Haynes

Buried beneath the headlines yesterday almost unnoticed, was a surprise increase in the UK deficit, or public sector borrowing figures. The UK borrowed £11.8bn in September, almost 30% more than anticipated, and it looks like despite healthier growth and unemployment figures, that the government’s deficit reduction programme could be way off course come the election next year.

In the first 6 months of this tax year, borrowing was in fact more than the same period last year – a significant setback for the government. Tax revenues have been much lower than expected, largely because a lot of the new jobs in the economy are lower paid or part time positions, which generate smaller tax revenues.

This could give the government a huge problem in the run up to the General Election, as planned tax cuts could have to be scrapped, or public spending will have to be slashed yet further – and in the next 9 months that could spell a very tricky period for the Pound indeed. And that’s not to mention problems with Eurozone growth which have a knock on effect, hurting the Pound as we saw in the recent Euro recession.

Looking at the shorter term, this morning we have the minutes from the latest Bank of England interest rate committee meeting. In recent months, 2 of the 9-strong committee have been voting for interest rate rises – and the anticipation of higher interest rates are one of the main reasons that the Pound has been doing better over the summer, particularly against the Euro where we recently saw the best exchange rates since the financial crisis for sending money to Italy, France, Spain and the rest of the bloc. However, lower inflation figures this month mean that the Bank is now likely to wait until next summer before raising interest rates – a sentiment that could be demonstrated this morning if the 2 votes ‘for’ interest rate hikes become votes ‘against’. That would be a clear signal that the move has been postponed, and we would be likely to see exchange rates fall back across the board this morning if that is the outcome.

The Pound lost nearly a cent against the Dollar in trading yesterday, although there was some improvement against the weaker Euro.

We could be about to enter an extremely fragile period in world markets again, and the Pound seems amongst the most vulnerable currencies, especially given its recent run of good form having perhaps further to fall than other major currencies.