UK Faces Emerging-Markets Trap Leaving Assets Highly Exposed
- UK mini-budget raises borrowing, adds to inflation risks
- Higher rates killing growth, outflow of capital increasing
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UK assets –- bonds, equities and the pound –- are more vulnerable than they have been in decades. Unrelenting inflation pressures will keep the BOE hawkish, but rate hikes will imperil growth, deterring the flow of foreign capital the UK needs to fund its current-account deficit.
Today’s UK “mini budget” has triggered a rout in sterling and gilts. Sterling parity is now up to a 1 in 7 chance of happening by the end of the year (from over 1 in a 100 only a few months ago). A combination of huge government-spending pledges and tax cuts will require a significant increase in UK borrowing.