After Kwasi Kwarteng vowed tax cuts, the pound plunged to a new record low


The pound rose when Kwasi Kwarteng promised tax cuts, and the Chief Secretary to the Treasury was applauding “sterling strengthening,” but minutes later it crashed to a new record low.

Chris Philp tweeted a graph displaying the short increase at 10am along with the words “Great to see sterling rising on the basis of the new UK Growth Strategy.”

However, when the Chancellor presented tens of billions of pounds in tax cuts and expenditure at 10.44am, the pound fell to a new 37-year low.

Additionally down were equity markets, with the FTSE 100 falling to its lowest level in two months.

As Kwasi Kwarteng addressed Parliament at 9.30am on Friday, the pound fell as much as 0.89 percent to 1.115 US dollars.

After fears about rising interest rates damaged the currency, it fell to a 37-year low earlier this week. It has subsequently stabilised at roughly 1.119 dollars, although this is still below the previous low.

It follows the Bank of England’s announcement on Thursday of a further 0.5 percentage point increase in interest rates to 2.25 percent and a warning that the UK may already be in a recession.

Prior to this announcement, the central bank had predicted that the economy would expand in the current fiscal quarter. However, it now anticipates that Gross Domestic Product (GDP) will decline by 0.1%, which would mean that the economy would have experienced two quarters of decline, which is the technical definition of a recession.

Economic experts have previously warned that the Chancellor’s plans to slash taxes may put more pressure on the pound, which has already been affected by the US dollar’s rise.

Martin Weale, a former Bank of England policymaker, warned that the new Government’s economic policies would “end in tears” and result in a run on the pound, similar to the one that occurred in 1976.

According to Chris Turner, global head of markets at ING, a currency may benefit from a combination of looser fiscal and tighter monetary policy provided it can be funded with confidence.

The problem is that investors are sceptical about the UK’s capacity to finance this package, which explains the underperformance of gilts.

“Gilt market indigestion is a genuine possibility, and one that should keep sterling susceptible,” the Bank of England said in a statement. “The Bank of England is committed to lowering its gilt holdings.”

The stock market, however, continues to be affected by worries about rising interest rates and impact on consumer spending.

Early trade saw the FTSE 100 drop 1.48 percent to 7,054.64 points, the lowest level since mid-July.

The pound may fall even lower due to measures that “lack credibility” and “raise worries about external financing pressures since the budget and current account deficit combined seems to be going to roughly 15% of GDP,” according to Derek Halpenny, head of research at MUFG.

In a survey conducted by Reuters last week of foreign banks and research consultancies, 55% of respondents said there was a strong danger that trust in British assets would decline significantly over the next three months.

Jonathan Haskel, a member of the Bank of England’s policymaking team, said yesterday that the institution was in a difficult situation since the government’s expansionary fiscal policy looked to conflict with the BoE’s attempts to reduce inflation.

The significant borrowing that would be needed to close the shortfall in the government’s finances has alarmed economists.

The two-year freeze on energy prices announced earlier this month for homes and companies may cost more than £150 billion on its own, and the tax cuts might add a further £50 billion to the bill.

According to the reputable IFS think tank, it would be the greatest tax change since Margaret Thatcher, Ms. Truss’s idol, was prime minister in Nigel Lawson’s 1988 Budget.

The continued decline in the value of the British pound relative to the US dollar—which this morning hit a new 37-year low of just 1.11—has highlighted the risks of adding to the UK’s £2.4 trillion pile of debt as the Ukraine crisis drives up inflation.

The 10-year yield on government gilts has experienced the greatest rise so far in August and September since October and November 1979, highlighting the markets’ apprehension about the situation.

Ms. Truss and Mr. Kwarteng, citing decades of mediocre productivity increases, contend that increasing economic activity may make up the gap.


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