The GBPEUR exchange rate is trading near the 1.1400 level after getting a boost from the Bank of England last week. The Threadneedle Street policymakers held interest rates at their record low of 0.1% and refrained from any further stimulus measures in the near future. The bank will now pass the baton to Chancellor Rishi Sunak who will deliver his budget for 2021 on March 4th.
We look ahead to the budget and consider the effects on the pound to euro exchange rate.
Sunak Faces a Tough Task on Current Trends
Rishi Sunak’s second budget since he became Chancellor has been billed as his opportunity to “set out the next phase of the plan to tackle the virus and protect jobs”.
The budget was set to take place in Autumn, but this was scrapped due to the virus pandemic. Sunak’s job will be a tricky one as forecasts have predicted the biggest economic decline for 300 years with the country’s national income set to shrink by 11% in 2020. The Bank of England also said last week that the pre-virus growth levels would come back in March 2022 if the economy opens up as expected.
Government borrowing is also on the rise to its highest level outside of the war era and unemployment is predicted to increase to 2.6 million. The furlough scheme which has supported the unemployment situation will be extended from March until April 2021. More than £46billion has already been paid out in furlough since the scheme began in 2020.
What to Expect From the Budget
The Chancellor was warned this week that raising taxes too early risks could dismantle the fragile recovery. The NIESR think tank were less optimistic than the BoE and saw pre-virus growth retuning in Autumn of 2022.
Sunak also gave businesses in the retail and hospitality sector year-long holiday from business rates, which also expires in April. Lobby groups are now saying that should be extended by another three months, while some are suggesting it should be widened to other sectors.
There will likely be action on VAT as businesses deferred $34 billion of sales but the payments are due on March 31st. On investment and R&D, businesses may also see the relief on the first £200,000 extended to £1 million pounds into the end of 2021.
Sunak has said he will offer a program to replace the Coronavirus Loan Scheme, which provides 80% state backed lending. Firms have tapped this for more than £80 billion of emergency loans, and there have been warnings that a large share will never be repaid.
For the GBP to EUR rate, the budget will expose a lot of cracks in the UK economy and it is the Chancellor’s opportunity to fill as many of those cracks while investors are looking on. If investors are concerned about his response, the Prime Minister may follow the budget with a reopening of the economy in the same month and that will support sterling.
If you have an upcoming currency exchange involving the pound, get in touch using the form below to discuss how these factors could impact your exchange rate.
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