Sterling stabilised on Wednesday, brushing off Britain’s record-high monthly budget surplus in January, preceding the forthcoming budget announcement by Finance Minister Jeremy Hunt in March.
In January, Britain recorded a budget surplus of £16.7 billion ($21.1 billion), attributed to unprecedented seasonal tax inflows.
This marked a significant increase from £7.5 billion the previous year, although falling short of economists’ forecast of £18.7 billion in a Reuters poll.
Analysts deliberated on the implications of the January budget surplus for the monetary outlook of the Bank of England (BoE) and the upcoming annual budget in March.
Kathleen Brooks, Research Director at XTB, remarked that despite the record surplus being lower than anticipated, it doesn’t imply that the UK economy is swiftly recovering and generating cash at a substantially faster rate.
She stated, “Economic growth is still likely to remain sluggish, so today’s data is unlikely to factor into the BoE’s decision on when to cut rates.
However, the question about tax cuts is now getting interesting.”
However, Brooks added that tax cuts in the following month are unlikely to result in significant extra consumption or inflation.
The BoE is anticipated to reduce interest rates in June, according to LSE Group’s forecast.
Traditionally, Britain experiences a surplus in public finances in January due to the annual income tax payments.
The long-term outlook for UK public finances remains challenging, with overall public debt soaring as a consequence of the COVID-19 pandemic.
Hunt aims to unveil tax reductions next month to bolster the declining popularity of the governing Conservative Party ahead of the anticipated national election, which Prime Minister Rishi Sunak is expected to announce later this year.
Hunt’s deputy, Chief Secretary to the Treasury Laura Trott, did not dismiss the possibility of further tax cuts in the budget following the reductions in November.
Jeremy Stretch, Head of G10 FX Strategy at CIBC Capital Markets, observed that “despite a surge of tax revenues, the January surplus falling short of median expectations suggests the potential fiscal expansion could be smaller than some had hoped.”
Sterling saw a marginal increase of 0.1% to $1.2633, remaining distant from Tuesday’s one-week high of $1.2668, having retreated from that level following comments from BoE Governor Andrew Bailey.
Bailey expressed comfort with investors’ anticipation of rate cuts this year but indicated signs of Britain’s economy rebounding after slipping into recession in late 2023.
Against the euro, sterling remained steady at 85.59 pence, after hitting a one-month low on Tuesday.