November 30, 2022

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The pound is collapsing, inflation is rising, government bonds are flying – Corriere.it


The new British Prime Minister, Liz Truss (La Presse)

Fear and uncertainty flood the markets, but investors are looking to the UK rather than Italy after the election, with the centre-right coalition led by Giorgia Meloni victorious. Such a storm, with the pound collapsing to its lowest level ever, and the sharp rise in the yield of British government bonds, which hit the bonds of other European countries,We haven’t seen it in 30 years, when Britain was forced to abandon the monetary system European (EMS). We Italians remember this well, because the crisis has also overwhelmed the lira, and it has been pushed out of the ems with the pound.

Then it was the speculation of George Soros’ bearish bet that ignited the markets. Today the origin of the currency crisis that is shaking the city is in Downing Street. On Friday, the government led by Liz Truss announced tax cuts, especially in favor of higher incomesFor 45 billion pounds (about 50.4 billion euros at the current exchange rate) measures will be financed from debtTreasury Secretary Kwasi Quarting said.

It’s the biggest tax cut in the last 50 years. Fears that tax cuts could balloon public debt and raise the cost of living as the UK teeters into recession.Inflation, at 9.9% in Britain, the highest among the G7 countries, has eroded real wagesThis sparked discontent and protests from workers. Strikes in the rail and postal sectors, to demand a raise in their salaries, were only suspended by the unions, due to the death of Queen Elizabeth II. But railway workers have already announced that they will return to the stop from October 10. It’s only newer A wave of unrest in various sectors of British industry, to demand better conditions and wage adjustments as the cost of living rose rapidly.

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The collapse of the pound makes the situation worse. The British currency fluctuated around 1.08 against the dollar on Monday afternoon, But early in the morning, the British currency fell to 1.035 against the dollar, the lowest level since the decimalization of the 1971 currency. In the fixed income sector, The 10-year British government bond yield rose to 4.13 Compared to the 3.5% recorded Friday before the maximum tax cuts were announced.

Uncertainty spread across the continent. And, as usual, it is the most fragile economies that suffer the most. The 10-year BTP yield increased to 4.48%, while the spread was 239 pips. Greek 10-year government bond yields jumped to 4.68% and Spanish to 3.27% but Even German bonds are now yielding 2.09%, while they were negative until a few months ago.

The Bank of England raised interest rates by 0.50 percentage points to 2.25% on ThursdayYou may need to meet urgently for a new rally to support the pound. It would be an extraordinary move. Since its independence from the Treasury in 1997, the Bank of England has not raised interest rates outside scheduled monetary policy meetings. s.ul Derivatives market for a bullish intervention of 0.75% in a week Then another increase by more than a point and a half by November, when the next meeting is scheduled. And if the cost of money today is 2.25%, expect it to reach 6% by May.

Late on Monday afternoon, the Bank of England intervened with a note but failed to reassure the markets. The central bank said it was watching the markets closely and would not hesitate to raise interest rates to curb inflation. They can inflate public debt and fuel more inflation while the UK teeters into recession. The bank said that it will fully assess the government’s financial and spending commitments before the next November meeting, and that He will not hesitate to change interest rates by the extent necessary to bring inflation back to the 2% target. sustainably in the medium term.

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Separation problemHigh interest rates hurt the economypenalizing investments, e It burdens savers, and burdens themQ installments musefulwhile high inflation eliminates purchasing power. A killer mixture.

So the opposition responded harshly. At the Labor Party ConferenceCFO Rachel Reeves talked about national emergency The Secretary of the Treasury identified, Kwasi Quarting and Prime Minister Liz Truss two Desperate gamblers chasing their losses in the casino.

Markets are waiting for Georgia Meloni’s first steps to put them to the test — from new government formation to economic maneuvering — for now, investors are looking elsewhere.

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