Kames Capital: Chancellor could end fiscal austerity to prevent the undermining of Sterling
The Chancellor of the Exchequer may use the upcoming Autumn Statement to reverse government fiscal policy to prevent the further undermining of sterling, Kames Capital’s Sandra Holdsworth has warned.
Following the UK’s decision to leave the European Union the economy has entered a period of elevated uncertainty and there are fears of an economic slowdown over the next 12-18 months.
However, Holdsworth, the co-manager of the Kames Absolute Return Bond Global Fund, believes a programme of targeted investing spending would help the UK government to fill the gap.
“We would normally expect loose monetary policy combined with loose fiscal policy and political uncertainty to weaken the currency. But sterling has already fallen a long way and looks reasonable value against most international currencies,” Holdsworth said.
“An infrastructure-based fiscal expansion directed at improving the productive capacity of the economy, alongside incentives to attract Foreign Direct Investment, would provide a powerful support for sterling at current levels.”
With the Autumn Statement coming on Wednesday 23rd November, Holdsworth said it would not be surprising to hear Chancellor Philip Hammond announce a reversal of government policy.
While the UK’s budget deficit is still around 5% of GDP, the opportunity to finance this has never been cheaper, according to Holdsworth, with long-gilt yields remain exceptionally low and likely to remain this way as the Bank of England restarts its Quantitative Easing programme.
“Eventful as 2016 has already been, this may mark the end of the UK’s fiscal austerity,” she said.
“Fiscal expansion directed at boosting consumption (for example through tax cuts) would cause the economy to look very different. Although it may appear stronger, the UK’s already high current account deficit would further deteriorate, undermining sterling’s value. Over to you Mr Hammond…”