INSIGHTS

Duncan Donald

Tue, Mar 10


Baptism of fire for the UK’s two new financial leaders

With the UK’s financial systems under new leadership, this Wednesday’s Budget falls right in the epicentre of a global financial crisis.  As pressure mounts on governments and central banks to take the right action to stem the slide brought by the expanding threat of the Coronavirus it could be said that the Budget falls at the worst possible time, but perhaps if the right action is taken, it could prove to be the best.

 

The challenges of the UK budget as the government try to show how they are going to expansively stimulate the economy in the midst of the Brexit separation from the Eurozone. So naturally, the challenges brought by the global virus epidemic now raises unneeded challenges for the new to roles of the Chancellor of the Exchequer and soon to be new Head of the Bank of England.

 

Following the resignation of Sajid Javid last month after a staffing reshuffle forced the departure of key members of his team, Rishi Sunak stepped into the role of Chancellor at the age of just 39. Despite his relatively young age he is reasonably well experienced in finance having had a stint at Goldman Sachs. At the Bank of England, the Departing Mark Carney leaves his post on March 16th for the incoming Andrew Bailey. Bailey is a former Deputy Governor of the BoE and Chief Executive of the PRA involved in bringing the UK through the tail end of the financial crisis.

 

Both men are capable on paper, and we are hearing that they have been in direct communication with each other as the Bank and Government look to find the best solution for the UK.  We previously referenced that this week’s budget could be falling at just the right time. Having seen even the Federal reserve try and fail to halt the sliding stock market last week the Bank of England need to tread carefully with rates. With base rates sitting at just 0.75% there is room for a cut (a reversal of the hike that came to stem the flow after the 2016 Brexit vote). But if there is a lesson to be learned from last weeks Fed, its that the markets know rate cuts aren’t going to be enough not least with the already low levels of rates.

 

Therefore, what we would expect to see from the Chancellor in tomorrow’s budget is a direct stimulus to businesses possibly via a direct lending facility to reassure and stimulate businesses and take the strain of the Banks. With Prime Minister Johnson having promised big on resource for the NHS prior to the virus hitting and considering the strain to this already stretched resource. It would be expected that we see people-pleasing pledges to bolster NHS resources for the inevitable surge in patients. This would likely deliver the strong fiscal stimulus needed to the markets with the option of either the Central bank cutting rates alongside it or more likely keeping the ammunition of a cut aside for use if needed.

 

This type of collaborative action would likely put the UK in a position of strength and lead to a higher British Pound.  The move would come as direct action at a scheduled and appropriate point and not be perceived as a panic move with no evident fiscal collaboration as was seen in the US last week.  However, the actions remain unknown until the Chancellor delivers them, but despite the global circumstance, the UK has a unique opportunity to act decisively, any failure to do so will have them at the mercy of cruel market volatility with future UK growth being a real concern. 


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