As Keir Starmer takes the helm as Britain’s new Prime Minister, the spotlight is on his economic agenda and its potential impact on the pound sterling.
The UK economy is at a crucial juncture after years of political turbulence and economic challenges, including Brexit, the COVID-19 pandemic and recent inflationary pressures. Starmer’s Labour government inherits a complex job, with promises of reform and growth on one hand and fiscal constraints on the other.
Below, we examine how Starmer’s proposed economic policies might influence the value and stability of the pound in the coming years.
Economic stability
Starmer’s commitment to economic stability through strict spending rules could bolster confidence in the pound. Labour’s pledge to maintain fiscal responsibility is likely to reassure investors and financial markets, potentially supporting the currency’s value.
By avoiding excessive borrowing and adhering to prudent financial management, the Labour government aims to create a more stable economic environment. This approach might help mitigate currency volatility and maintain the pound’s strength in international markets.
Growth focus
The Labour government’s commitment to boosting the UK economy is illustrated by the fact that it references the term more than 200 times in its manifesto. Initiatives such as the National Wealth Fund and increased infrastructure investment are designed to stimulate economic activity, which may have a positive impact on the pound.
If successful, these measures could lead to higher productivity and stronger economic performance, which typically supports a stronger currency. However, the effectiveness of these policies and their effects on the pound will depend on their successful implementation and the broader economic context.
Business-friendly policies
Starmer’s promise to cap corporation tax at 25% and provide a more stable business tax regime might attract foreign investment and potentially benefit the pound. By creating a competitive business environment, these policies aim to encourage both domestic and international companies to invest in the UK.
Increased business activity and foreign direct investment often lead to higher demand for the local currency, which may strengthen the pound’s position.
Energy ambitions
Starmer’s enthusiastic plans to make Britain a clean energy superpower could have long-term implications for the pound. A shift towards sustainable sources may reduce the UK’s reliance on imports, potentially improving the trade balance and supporting the currency.
Additionally, becoming a leader in clean energy technology might attract investment and boost economic growth, indirectly strengthening the pound.
What does the future hold?
While Starmer’s economic plans offer potential benefits for the pound, their actual impact remains uncertain. The immediate market reaction to Labour’s victory has been muted, as it was widely anticipated.
However, the factors we’ve outlined above should significantly influence the pound’s trajectory, together with future policy announcements such as the autumn budget. As such, they will likely be closely watched by those trying to make a profit through forex trading, as shifts in the pound’s value may present significant risks and opportunities in the financial markets.
It’s also important to note that the government faces serious fiscal challenges in funding its spending commitments without substantial tax increases or increased borrowing – which could lead to some volatility in the pound’s value. The new government’s ability to navigate these economic challenges will heavily determine the pound’s performance in the coming years.