In the face of UK’s biggest tax cuts in 50 years, the pound has sunk to a record low against the dollar. Sterling fell just below $1.04, but moved up to around $1.05 on Monday. The euro also hit a 20-year-low. During a ‘mini-Budget’ on Friday, Chancellor Kwasi Kwarteng announced changes in UK taxes. He declared a £45bn package, and promised more tax cuts.
The Chancellor called this a ‘new era’ for the economy, under which the UK requires a major change of direction to boost economic growth. He told BBC that he intends to continue cutting taxes.
If this slump continues, imported commodities priced in dollars like oil and gas will become more expensive. Electronic goods like iPhones manufactured overseas will also get more costly. That goes for products made in the UK with imported parts too. Both household finances and travelling abroad will take a hit. Investors fear that the Bank of England will have to take emergency action to stop the pound from falling further.
“All currencies are getting sold off against the US dollar, so there is a large element of US dollar strength.” Peter Escho, co-founder of Wealthi, an investment firm, told BBC. “But with the pound, it has really been exacerbated by news that the new government will be cutting taxes, which is inflationary. Add to that recent energy subsidies and news that the Bank of England might need to have an emergency rate-hike meeting, this all results in a sense of panic.”
“To stop the bleeding even temporarily, the Bank of England may well enter ‘whatever it takes’ territory to bring inflation down.” BBC quoted Stephen Innes, managing partner, SPI Asset Management. An emergency meeting rate hike could happen as soon as this week to regain credibility in the market. We could even see a hike today.”