Macroeconomics: UK crises risk GBP collapse

By Mansoor Mohi-uddin

Chief Economist

• The UK’s economic and political crises are increasing the risk of a GBP collapse, similar to 1985 when 1.05 was reached against the USD.
• Inflation is at three-decade highs above 10%. The economy is set to enter recession as Russia causes European energy prices to soar, and industrial disputes over pay are worsening.
• At the same time, UK public services are near breaking point after the pandemic, Brexit continues to disrupt trade and the government is paralysed until a new prime minister starts.
• The Bank of England has lifted its Bank Rate to 1.75%. We expect a 50bps September rise and 25bps in November and December. But rate hikes may not avert a GBP collapse this year.

Source: AFP

The UK’s crises are raising the risk of a GBP collapse. The currency has fallen to 1.17 against the USD, near its lows of 1.15 after the UK voted to leave the European Union as the first chart shows. A sudden loss of investor confidence now could see a test of its all-time low of 1.05 in 1985.

Source: Bank of Singapore, Bloomberg.

This summer the UK is suffering several crises.