Pound Sterling Off Pre-announcement Highs Against Euro and Dollar

Above: The Chancellor of the Exchequer Jeremy Hunt poses outside 11 Downing Street with the Red Box, alongside the other Treasury ministers, before he delivers the Budget to parliament. 10 Downing Street. Picture by Simon Walker / No 10 Downing Street.

The British Pound has come off its pre-budget highs against the Euro and Dollar as Chancellor Jeremy Hunt rolls out the Spring Budget, which won’t bother the Bank of England.

The Pound to Euro exchange rate eased back to just below 1.17 after Hunt announced a combination of measures that would likely put further downward pressure on inflation while the scope for a major stimulus remains minor.

Hunt said he would freeze fuel duty and extend a temporary 5p tax cut to the duty for another year. Economist Julian Jessop from the IEA says this will knock another 0.2 percentage points off inflation in April – relative to the Bank of England’s forecast – while only costing a little over £1BN.

According to Hunt, borrowing was now expected to be lower than forecast in the Autumn Statement, prompting a slight fall in UK bond yields as markets interpreted this as meaning there was scope for the Bank of England to cut rates by mid-year.

The slight decline in bond yields helped the Pound to Dollar exchange rate ease to 1.2718.

Hunt announced the government would meet its fiscal rule with £8.9BN of headroom, which is lower than speculated ahead of the announcement, confirming limited freedom to announce decisions that could stimulate the economy and raise inflation.

“This budget meets the Chancellor’s ‘self-imposed’ fiscal rules by £8 billion. NIESR has long argued that the fiscal framework needs an overhaul. By discouraging public investment, the current framework acts as a constraint on growth,” says Prof. Stephen Millard, Deputy Director at the National Institute of Economic and Social Research.

The Office for Budget Responsibility (OBR), which sets out the fiscal rules on behalf of the government, says UK GDP will rise 0.8% in 2024 (vs 0.7% expected in the last set of forecasts made in November), 1.9% in 2025 (vs 1.4% in Nov).

This upgrade to growth will, on net, help the Pound defend its recent gains.