Emerging markets veteran Mark Mobius says the UK is now feeling the “disastrous” effects of its vote to leave the EU, and the Bank of England needs to get a grip on the money supply to tame soaring inflation and put the pound back on track.
“Brexit was a mistake, since it complicated trade, defence and immigration relations with the UK and the continent,” the veteran fund manager told Financial News.
“A continuation of the UK’s membership of the EU would have represented a stronger and united Europe better to handle the challenges now facing those countries in terms of energy [and] relations with Russia.”
Despite a recent sharp fall in the pound’s value — prompted by a multi-billion pound package of tax cuts announced by the UK government on 23 September — Mobius said the currency plunge was an “opportunity for the UK to export more”.
“That should be encouraged by quickly reaching agreement with the EU on trade issues and providing tax incentives for exporters,” he said. “The UK is now also suffering the after effects of leaving the EU which is now turning out to have been a disastrous decision.”
The pound has fallen sharply in the days following the mini-budget announced by UK chancellor Kwasi Kwarteng, which included £45bn of tax cuts — the biggest round in decades.
The pound GBPUSD, +0.16% slipped below $1.03 at one point on 26 September, dragging the currency to its lowest-ever recorded level.
“It appears that the new UK government is determined to ensure that the population does not suffer from higher prices, particularly fuel, and are thus throwing caution to the wind [with] the expansion of government spending,” said Mobius.
Some fund managers said the Bank of England should step in with an emergency rate hike in order to prevent further drops in sterling. The central bank has already raised the base rate to 2.25% in order to tackle soaring UK inflation, which at the end of August stood at 9.9%.
Threadneedle Street responded to the plunging currency with a statement saying it was “monitoring developments in financial markets very closely” and “will not hesitate” to raise rates to meet its 2% inflation target. On 28 September, it announced a plan to buy long-dated bonds TMBMKGB-10Y, 4.049% to restore order to the gilt market.
The chancellor met with City bosses on 27 September, including Fidelity International’s Anne Richards and Aviva Investors’ Mark Versey, to reassure them over the government’s approach.
“We are confident in our long-term strategy to drive economic growth through tax cuts and supply-side reform. Supply-side reforms are critical – increasing capacity brings down prices,” Kwarteng told them.
He also outlined how the government plans to overhaul regulation in the City to take advantage of its departure from the EU.
“Big Bang 2.0 next month is a top priority of mine. We need to get the City and the UK back to where it always has been — the world’s foremost financial centre,” he said.
“There’s lots we can do in the financial services space to liberalise regulations that will drive economic growth.”
Mobius said the Bank needed to “cut down on money supply” to bring the pound back under control.
“In the last few years, money supply has ballooned by over 20%. While reducing money supply they will be able to reduce interest rates,” said Mobius.
The UK’s money supply reached £3trn at the end of 2021, up from £2.4tn at the end of 2017, according to figures from the Office for National Statistics.
“All the inflation and cost of living increases [are] due to the devaluation of the pound, and that is due to the excess money supply,” said Mobius.
This story originally appeared at FNLondon.com