This brings the pound into calmer waters

The British Labour government has resisted the temptation to open its wallet and has instead made significant cuts in the spring budget, indirectly paving the way for further appreciation of the British pound.

Is it wise to book a weekend in London for Easter, or is it cheaper to do so next year? Anyone who travelled to the British Isles two years ago will be a bit taken aback when they see the prices for a new visit. Firstly, inflation was still quite high in the United Kingdom, especially in the summer and autumn of 2023. In addition, the British pound rose by more than 7% against the euro, mainly due to a surge in exchange rates last year. Finally, you should not forget that since 5 March you have only been allowed to enter the United Kingdom with an ETA that you have to buy for £10. This makes a trip to London quite an expensive affair.

Finger on the snap
Incidentally, the pound did take a step back in March. However, that is more the strength of the euro than the weakness of the pound. Almost a month ago, the German government unveiled a major investment program. As a result, the interest on German government bonds shot up, making it more lucrative for parties to keep their assets in these (euro) loans, which are known to be very safe. The interest on British government bonds has hardly risen since the turn of the year. Because while Germany is opening its wallet for major investments in infrastructure, defense and green energy, the Labour government is keeping a tight rein on the purse strings.

Getting government finances in order
Last week, Chancellor of the Exchequer Rachel Reeves presented the annual Spring Memorandum. Little of the party’s centre-left leanings were reflected in the budget. Reeves had to implement significant cuts to ensure that the budget surplus would still amount to almost £10 billion in a few years. This scope is desperately needed to convince financial markets of the sustainability of British government finances. As part of the Labour plans, a number of benefits will be cut back. An analysis of the Labour party’s own findings shows that the policy will result in around 2030 people living in relative poverty by 250.000 as a result of the cuts.

Interest rate differential supports the pound
Because many economists are taking into account a somewhat less frugal budget policy, the pound is getting some breathing space, unlike the British population. The currency has been creeping towards a level of €1,20 in recent days. After the spring budget, attention is shifting back to inflation and the policy of the Bank of England. The British government is taking into account an inflation of 3,2% in the current year. That level is a bit higher than the more than 2% in the eurozone. For the time being, the interest rate difference between the United Kingdom and the European mainland is therefore unlikely to become smaller. This interest rate gap plays into the hands of the pound. Although a weekend in London is already a lot more expensive than it was one or two years ago, you could easily regret it if you postpone the trip.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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