he pound could benefit against the euro and the US dollar if Chancellor Rishi Sunak's cost of living package helps give a boost to consumer confidence in the coming weeks, analysts have said.
Speaking on Sky News on Friday morning, a day after announcing the £15bn giveaway for the cost-of-living crisis, Rishi Sunak said that he took a pragmatic approach on taxing the energy sector’s rising earnings. While the government was criticised for taking too long to act, Sunak explained that “It was right to wait until we had some more certainty about what would happen to energy bills in the autumn.” He also explained that electricity producers who avoided the energy profits levy could also face extra tax too, as the government has plans to reform the energy sector.
With energy prices continuing to rise, the government is expected to provide further measures, so the same situation is not repeated next year.
Will the package affect inflation?
The Chancellor explained that the new package will have minimal impact on inflation, much less than 1%, as it is targeted at those in need, while money is being raised through the windfall tax to pay some of the bill.
Sunak also noted that benefits and pensions could also rise ahead of inflation next year, which could push the benefits bill up by £25bn.
Sunak very confident about the outlook for UK economy
Sunak said he was “very confident” about the UK’s economic outlook. He told Radio 4 that the rise in energy prices and the tight labour market have pushed inflation higher. “We are experiencing inflation pressures from both a tight labour market, although that is something to celebrate, but also the energy price shock,” he said.
Deutsche Bank: recession could be avoided
The Chancellor’s £15bn support package should help the UK avoid falling into a recession, analysts at Deutsche Bank said. In a note to clients, Sanjay Raja, Deutsche’s chief UK economist, said that the £400 energy bill rebate and the £650 benefit to the lowest income houses will provide a modest boost to growth. He said the effects of the support will only come later in the year, which will leave households to deal with the real income shock for several more months without much support.
PM Boris Johnson is also optimistic that the UK can avoid falling into a recession, despite the difficult times that lie ahead. “We’re going to have a difficult period, and we’ve got to be absolutely clear with people it’s going to be difficult, and the government cannot solve every problem. We can’t cover everybody’s extra cost. But what we can do is make sure that we deal with the underlying causes of inflation, but also keep our economy strong and open to investment.”
As some analysts have noted, the Chancellor’s support package may have minimal impact in the near-term for the pound, but as soon as more positive economic data is released especially later next month, the then the pound could strengthen.
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