The pound has reached a record low versus the dollar as markets respond to the United Kingdom’s largest tax cuts in half a century.
In early Asian trade, the value of the pound dipped close to $1.03 before reclaiming ground to reach $1.07 by Monday morning, UK time.
In anticipation of an increase in borrowing, Chancellor Kwasi Kwarteng has promised additional tax cuts on top of the £45bn plan he announced on Friday.
On Monday, the cost of British government borrowing continued to rise.
If the pound remains at this level against the dollar, imports of dollar-priced goods, such as oil and gas, will be more expensive.
Inflation, which is already at its highest level in decades, might be pushed even higher if other imported commodities become substantially more expensive.
And British tourists visiting the United States will find that their vacation funds do not stretch as far as they used to.
There are also fears that the government’s plans to reduce taxes and borrow billions would fuel rising inflation and push the Bank of England to increase interest rates even further.
This would increase mortgage payments for millions of homeowners each month.
While concerns about the British economy have weighed on the pound, the dollar’s strength has also weighed on its value.
Concerns over the possibility of a recession have caused other currencies to decline against the dollar, with the euro hitting a new 20-year low against the dollar.
The Bank boosted interest rates by a half percentage point to 2.25 percent last week to curb inflation, which is at a 40-year high of 9.9 percent. The rate hike was the sixth in a row and the greatest in fourteen years.
Nonetheless, some analysts have suggested that the Bank may hold an emergency meeting as soon as this week to increase interest rates once more. The Bank of England refuses to comment on the matter.
Currently, market analysts predict that interest rates could reach 5.5 percent or even higher by next spring.
Why the sinking pound is significant
Every day, investors from all over the world trade enormous quantities of foreign currency. The rate at which investors exchange currencies also affects the exchange rates at banks, post offices, and international exchanges.
Many individuals do not consider currency rates until it is time to exchange money for a foreign vacation. Things will be more expensive when traveling abroad if the pound buys less of the local currency.
However, a decline in the value of the pound also impacts household finances.
If the value of the pound falls, the cost of importing products from abroad increases.
For instance, since oil is priced in dollars, a weak pound can increase the cost of filling up your gas tank. Similarly, gas is priced in dollars.
Foreign-made technology products, such as the iPhone, may become more expensive in the United Kingdom. Even items created in the United Kingdom with imported components can become prohibitively expensive.
Sir John Gieve, a former deputy governor of the Bank of England, told the BBC: “I’m certain they don’t want to do that… because it would indicate pressure.
Emergency meetings are avoided whenever possible, and I do not doubt that they will attempt to avoid this one.
Former Bank of England rate-setting committee member Sushil Wadhwani stated, “If I were still there, I would be tempted to announce an extra meeting in a week.
“The rationale for waiting a week would be to give them adequate time to evaluate the additional news. The reason they are not waiting until November is because they recognize the importance of responding promptly to the new developments.”
He continued, “Of course, the Bank of England’s conduct is a suboptimal option. The first step would be for the chancellor to submit a viable financial plan that has been approved by the Office of Budget Responsibility.”
On Monday, the cost of borrowing by the British government increased again. Interest rates on two- and five-year loans reached 4.5 percent, the highest level since the 2008 financial crisis, while rates on 10-year loans reached their highest level since April 2010.
Mr. Kwarteng stated over the weekend that there will be “more to come” in terms of tax cuts after introducing a substantial tax overhaul on Friday during a “mini-budget” to stimulate economic growth.
Under the measures, which he described as ushering in a “new era” for the economy, income tax and stamp duty on property sales will be reduced, while anticipated increases in corporate taxes have been canceled.
In addition to outlining £45 billion in tax cuts, the government stated that it would spend £60 billion in the first six months of its scheme to subsidize growing energy costs for consumers and companies. However, this cost is anticipated to increase as the household assistance program will extend for two years.
Rachel Reeves, the shadow chancellor, characterized the decline in sterling as “very worrying.
She continued, “We need to hear from the chancellor his intentions to regain control of the public finances since this is a major concern for market traders” and “working people.”
Friday, the Treasury declined to provide a projection by the independent Office for Budget Responsibility regarding the economic outlook and future borrowing and debt of the United Kingdom.
Chris Mason stated that, despite the ministers’ silence, he had the idea that they want to ride this out. They hope that the volatility is temporary.
However, he reported that a Conservative MP informed him, “This is quite concerning.” All of the wheels may fall off.”
Paul Davies, CEO of Carlsberg Marston’s Brewing Company, stated that the decline in the value of the pound was “worrying” for the British beer business, which buys hops from abroad.
He stated, “Many of the hops used in this country are imported, and a great deal of them, especially for craft brewers, are imported from the United States; therefore, currency fluctuations are truly concerning for the business.
People also consume a great deal of imported European beers, and the euro vs the pound is something we’re keenly monitoring at the moment.
